Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
12th Edition
ISBN: 9781259144387
Author: Richard A Brealey, Stewart C Myers, Franklin Allen
Publisher: McGraw-Hill Education
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Textbook Question
Chapter 26, Problem 14PS
Catastrophe bonds On some catastrophe bonds, payments are reduced if the claims against the issuer exceed a specified sum. In other cases, payments are reduced only if claims against the entire industry exceed some sum. What are the advantages and disadvantages of the two structures? Which involves more basis risk? Which may create a problem of moral hazard?
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Why do noninvestment-grade bonds have much higher direct costs than investment-grade issues?
Counterparty credit risk is a function of the probability of default, exposure at default, and loss given default. Assuming that the individual exposure at default with a counterparty is fixed, which of the following statements is correct?
A. The probability of default can be mitigated by collateral, and exposure at default can be mitigated by netting.
B. The probability of default can be mitigated by netting, and exposure at default can be mitigated by collateral.
C. Loss given default can be mitigated by collateral, and exposure at default can be mitigated by netting.
D. Loss given default can be mitigated by netting, and exposure at default can be mitigated by collateral.
The issuance costs of new debt securities can be ignored since those costs will not be reflected in the yield to maturity of the debt in the future.
Select one:
a. False
b. True
Chapter 26 Solutions
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 26 - Vocabulary check Define the following terms: a....Ch. 26 - Prob. 2PSCh. 26 - Prob. 3PSCh. 26 - Futures prices Calculate the value of a six-month...Ch. 26 - Prob. 5PSCh. 26 - Prob. 6PSCh. 26 - Prob. 7PSCh. 26 - Prob. 8PSCh. 26 - Prob. 9PSCh. 26 - Prob. 10PS
Ch. 26 - Hedging You own a 1 million portfolio of aerospace...Ch. 26 - Prob. 12PSCh. 26 - Prob. 13PSCh. 26 - Catastrophe bonds On some catastrophe bonds,...Ch. 26 - Futures contracts List some of the commodity...Ch. 26 - Prob. 16PSCh. 26 - Prob. 17PSCh. 26 - Prob. 18PSCh. 26 - Prob. 20PSCh. 26 - Prob. 21PSCh. 26 - Prob. 22PSCh. 26 - Hedging What is meant by delta () in the context...Ch. 26 - Futures and options A gold-mining firm is...Ch. 26 - Prob. 25PSCh. 26 - Hedging Price changes of two gold-mining stocks...Ch. 26 - Risk management Petrochemical Parfum (PP) is...Ch. 26 - Total return swaps Is a total return swap on a...Ch. 26 - Prob. 30PSCh. 26 - Prob. 31PSCh. 26 - Prob. 32PSCh. 26 - You are a vice president of Rensselaer Advisers...
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- Explain the use of a sinking-fund provision. How can it reduce the investor’s risk? What are protective covenants? Why are they needed? Explain the use of call provisions on bonds. How can a call provision affect the price of a bond? Explain the use of bond collateral, and identify the common types of collateral for bonds. What are debentures? How do they differ from subordinated debentures? What is a bond indenture? What is the function of a trustee with respect to the bond indenture? What are the advantages and disadvantages to a firm that issues low- or zero-coupon bonds?arrow_forwardWhat causes a gain or loss on the sale of a bond investment? Group of answer choices when the selling company negotiates a better price when the selling price of the bond differs from the book value (cost) of the bond when the selling company has unamortized discounts when the selling company has unamortized premiumsarrow_forwardThe realized gain (loss) on sale of debt investments with an objective of collecting contractual cash flows and to sell when circumstances warrants is the difference of the net selling price and the fair value of the bonds. Group of answer choices False Truearrow_forward
- 1. Should financial institutions invest in junk bonds? 2. Explain the use of call provisions on bonds. How can a call provision affect the price of the bond?3. What are protective covenants? Are they needed? Explain why.arrow_forwardWhat tools are available for solving adverse selection and moral hazard problems in debt contracts and in equity contracts?arrow_forwardConvertible bonds a. Provide potential benefits only to the issuer.b. Provide potential benefits only to the investor.c. Provide potential benefits to both the issuer and the investor.d. Provide no potential benefits.arrow_forward
- A credit derivative allows creditors and debtors to _________ their exposure to credit risk. For example,______able to effectively transfer some or all of the risk of a__________defaulting to a third party in exchange for a __________.arrow_forwardFrom Service Leader’s perspective, why are the bonds callable? What does that mean?arrow_forwardWhy would the company redeem the bonds prior to the maturity date if they were going to recognize a loss? Can you think of an example of such a decision we might face in our personal lives?arrow_forward
- Which of the following is not a reason for the issuance of long-term liabilities? Debt financing dilutes ownership interest. Debt may be the only available source of funds. Debt financing may have a lower cost. Debt financing offers an income tax advantage.arrow_forwardDoes collateral reduces moral hazard by borrowers? Why?arrow_forwardWhen selling bonds at a premium, the premium received effectively a.does not affect the cost of borrowing. b.increases the cost of borrowing. c.reduces the cost of borrowing. d.reduces the amount of cash received when bonds are sold.arrow_forward
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