A company would like to borrow some money but market conditions are such that rates are above the level (in this case, they would have to pay 9 ½% for a 20-year bond issue) they would like to pay over the next 20 years – and above the level they think rates will be at after about 5 or 6 years. They have considered adding a call provision which would allow them to call the debt, after a 5-year “no call” period, at a 10% call premium. What is the call price that the company is committing to and how would you analyze this option? (Think through the costs and the risks)
A company would like to borrow some money but market conditions are such that rates are above the level (in this case, they would have to pay 9 ½% for a 20-year bond issue) they would like to pay over the next 20 years – and above the level they think rates will be at after about 5 or 6 years. They have considered adding a call provision which would allow them to call the debt, after a 5-year “no call” period, at a 10% call premium. What is the call price that the company is committing to and how would you analyze this option? (Think through the costs and the risks)
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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A company would like to borrow some
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