boken kap 16 del 3

Question 1

Q8: When should a company call its bonds?

Answer 1

A: When the value of the callable bond plus new issue costs exceeds the call price.

Question 2

Q10: What two factors determine a bond’s debt rating?

Answer 2

1. The likelihood of default.
2. The protection provided in the event of default.
   Q11: What does an AAA bond rating indicate?
   A: It represents the best quality and the lowest degree of risk.
   Q12: What does a D bond rating indicate?
   A: The firm is in default.

Question 3

Q13: What are junk bonds?

Answer 3

A: Bonds with a rating of BB or below. They are also called high-yield, speculative, or low-grade bonds.

Question 4

Q1: What are floating rate bonds?

Answer 4

A: Bonds with adjustable coupon payments.

Question 5

Q2: What is a put provision in floating rate bonds?

Answer 5

A: The holder has the right to redeem the note at par on the coupon payment date.

Question 6

Q3: What are floor and ceiling provisions?

Answer 6

A: Minimum and maximum limits on the coupon rate.

Question 7

Q4: How do floaters reduce inflation risk?

Answer 7

A: By adjusting the coupon payments, they help protect against inflation’s effects on bond value.

Question 8

Q5: What are deep-discount bonds?

Answer 8

A: Bonds that pay no coupon and are sold at a price much lower than their face value (e.g., zero-coupon bonds).

Question 9

Q6: How are coupon payments determined for income bonds?

Answer 9

A: Based on the company’s income.

Question 10

Q7: Why are income bonds advantageous for companies?

Answer 10

A: They reduce the risk of financial distress since payments are only made in profitable years.

Question 11

Q8: What are the two reasons companies rarely issue income bonds?

Answer 11

1. The “smell of death” explanation: Signals potential financial distress to the market.
2. The deadweight loss explanation: Disagreements between shareholders and bondholders about income calculation.