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)
Chapter19: Lease And Intermediate-term Financing
Section: Chapter Questions
Problem 14P
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A company would like to borrow some
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