Suppose a company is choosing between bank loans and bonds. The interest rate in the bank loan is 3.5%, and an investment bank predicted that the company will pay close to 4% to issue a bond with the same maturity. In addition, fees are estimated to be higher for the bond issuance than for the bank loan. Explain why this company may still decide to issue the bond rather than borrowing through a bank.

Suppose a company is choosing between bank loans and bonds. The interest rate in the bank loan is 3.5%, and an investment bank predicted that the company will pay close to 4% to issue a bond with the same maturity. In addition, fees are estimated to be higher for the bond issuance than for the bank loan. Explain why this company may still decide to issue the bond rather than borrowing through a bank.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter16: Working Capital Policy And Short-term Financing

Section: Chapter Questions

Problem 23QTD

See similar textbooks

Similar questions

Suppose Bank One offers a risk-free interest rate of 5.0% on both savings and loans, and Bank Enn offers a risk-free interest rate of 5.5% on both savings and loans. a. What arbitrage opportunity is available? b. Which bank would experience a surge in demand for loans? Which bank would receive a surge in deposits? c. What would you expect to happen to the interest rates the two banks are offering? a. What arbitrage opportunity is available? (Select the best choice below.) O A. Take a loan from Bank One at 5.0% and save the money in Bank Enn at 5.5%. O B. Take a loan from Bank One at 5.5% and save the money in Bank One at 5.0%. O C. Take a loan from Bank Enn at 5.5% and save the money in Bank One at 5.0%. O D. Save at both banks. b. Which bank would experience a surge in demand for loans? Which bank would receive a surge in deposits? (Select the best choice below.) O A. Bank One would experience a surge in the demand for loans, as will Bank Enn. O B. Bank One would experience a surge in…
1.) A bank has purchased a significant amount of loan receivables of another bank. The loan portfolio is made up of several home mortgages, making it essentially a mortgage-backed security. The investing bank has created its cashflow forecast from the receivable but faces the risk that if interest rates decline, principal payments will be made earlier and that interest collections will not happen. What risk does the bank face?* A.)Mortgage Default Risk B.) Mortgage Prepayment Risk C.) Mortgage Settlement Risk D.) Mortgage Extension Risk 2.) The mortgage contract states that the debtor must pay a minimum of P100,000 per year on the 7% interest, P1,000,000 loan. The balance would be due by the end of the tenth year as a lump sum. A.) Balloon payment mortgage B.) Rollover mortgage C.) Home equity loans D.) Construction to permanent mortgages 3.) Which of the following would have inflationary effect on the economy? [1] BSP releasing new bonds in the market [2] BSP decreasing the repo…
How should a bank structure its liquid assets portfolio to take advantage of falling interest rates ? a. The bank should invest in short-term securities to minimise capital loss b. The bank should invest in long term securities to maximise capital gains. c. The bank should borrow at fixed interest rates d. The bank should issue certificate deposits with fixed interest rates. e. The bank should hold cash to maximise its interest income. Which option is correct
Which of the following concerning short-term financing methods is CORRECT? Group of answer choices: Accruals and accounts payables do not carry explicit interest charges. Firms generally have a good control over the level of accruals. Commercial papers typicall have maturities between nine months to one year. Short-term bank loans typically require assets as collateral. Commercial papers typically carry similar interest rates to prime rates.
Imagine that you are in the position of buying loans in the secondary market (that is, buying the right to collect the payments on loans ) for a bank or othe r financia l services company.Explain why you would be willing to pay more or less for a given loan if: a. The borrower has been late on a number of loan payments b. Interest rates in the economy as a whole have risen since the bank made the loan c. The borrower is a firm that has just declared a high level of profits d. Interest rates in the economy as a whole have fallen since the bank made the loan
Which of the following would increase a bank’s Net Interest Margin, assuming all else stays the same? Choose Two an increase in the interest rate on its loans companies paying off some of their loans and the bank using the funds to purchase Treasury bonds customers switching a portion of their time deposits to demand deposits the bank issues additional equity and keeps the funds in cash an increase in the federal funds rate assuming the bank borrows more in the federal funds market than it lends
Credit ratings affect the yields on bonds. Based on the scenario described in the following table, determine whether yields will increase or decrease and whether it will be more expensive or less expensive, as compared to other players in the market, for a company to borrow money from the bond market. Scenario Impact on Yield Cost of Borrowing Money from Bond Markets XYZ Co.’s credit rating was downgraded from AA to BBB. A company uses debt to buy another company. Such an event is called a leveraged buyout. A company’s financial health improves. There is an increase in the perceived marketability of a company’s bonds, so the liquidity premium decreases.
Fleeson Company needs additional funds to purchase equipment for a new production facility and is considering either issuing bonds payable orborrowing the money from a local bank in the form of an installment note. How does an installment note differ from a bond payable?
The company's bank won't lend it any more money than it already has, and investment bankers have said that debentures are out of the question. The treasurer has asked you to do some research and suggest a few ways in which bonds might be made attractive enough to allow the company to borrow. Please provide a detail explanation for each Explain how to secure the bonds with owned assets in great detail. In what ways does it make the bonds more attractive to allow the company to borrow? What is the agreement to subordinate future debt? How does it make the bonds more attractive?
The company's bank won't lend it any more money than it already has, and investment bankers have said that debentures are out of the question. The treasurer has asked you to do some research and suggest a few ways in which bonds might be made attractive enough to allow the company to borrow. Explain how to secure the bonds with owned assets in great detail. In what ways does it make the bonds more attractive to allow the company to borrow?
Consider a bank with the following balance sheet (Shown in image):a) Calculate the equity (total asset – total liability) to asset ratio of the bank(Hint: equity to asset ratio = total equity/total asset) b) Calculate the duration and convexity of the both asset and liability sides; c) If the interest rates go up by 1%, using the duration and convexity rule to determine the networth of the bank and the equity to asset ratio; d) In c)’s scenario, to maintain the equity to asset ratio at 40% which is required by the regulation,the bank decides to raise cash (zero duration and zero convexity) from the equity holders.How much cash does the bank need to raise? e) Do you agree with the following statement? Explain why. “The information about a bond’s duration and convexity adjustment is sufficient to quantifyinterest rate risk exposure.”
The company's bank won't lend it any more money than it already has, and investment bankers have said that debentures are out of the question. The treasurer has asked you to do some research and suggest a few ways in which bonds might be made attractive enough to allow the company to borrow. Explain how to secure the bonds with owned assets in great detial. In what ways does it make the bonds more attractive to allow the company to borrow?