conceptSM_ch21

conceptSM_ch21 - CONCEPT QUESTIONS - CHAPTER 21 21.2 Do...

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CONCEPT QUESTIONS - CHAPTER 21 21.2 Do bearer bonds have any advantage? Why might Mr. "I Like to Keep My Affairs Private" prefer to hold bearer bonds? They have the advantage of secrecy. What advantages and what disadvantages do bondholders derive from provisions of sinking funds? They provide additional security as an early warning system if sinking fund payments are not made. But if interest rates are high, the company will buy the bonds from the market, and if rates are low, it will use the lottery, exercising an option that makes sinking fund bonds less attractive to bondholders. What is a call provision? What is the difference between the call price and the stated price? It is an option that allows the company after a certain number of years to repurchase the bonds at the call price. This option will only be exercised if interest rates drop. The difference between the call price and the stated price is the call premium. 21.3 What are the advantages to a firm of having a call provision? If interest rates go down and the market bond prices are higher than the call price,
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This note was uploaded on 03/17/2009 for the course ACTSC 371 taught by Professor Wood during the Fall '08 term at Waterloo.

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conceptSM_ch21 - CONCEPT QUESTIONS - CHAPTER 21 21.2 Do...

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