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Chapter 5: 5BP (page 528)

Match the yield to maturity in column 2 with the security provisions (or lack thereof) in column 1. Higher returns tend to go with greater risk.

(1) (2)

Security Provision Yield to Maturity

a.Debenture a.6.85%

b.Secured debtb.8.20%

c.Subordinated debenture c.7.76%

Short Answer

Expert verified
  1. Debenture 鈥� 8.20%
  2. Secured debt 鈥� 6.85%
  3. Subordinated debt 鈥� 7.76%

Step by step solution

01

Concept of secured, unsecured, and yield to maturity for debt

Secured debts are those that are backed up by some class of assets. Thus they are less risky in terms of default. Because of lower risk, interest is also earned less on these debts.

On the contrary, unsecured debt does not have any security and charges higher interest for taking more risk.

02

Matching yield to maturity with security types

a. Debenture 鈥� it is the security that does not need any security for providing loans. Thus the risk is higher in this case. So, the interest earned on the debenture would be 8.20%.

b. Secured debt 鈥� Since it is the secured debt, it has been backed up by certain assets. So, the risk is lowest under this type of loan, In this case, the yield to maturity would be 6.85%.

c. Subordinate debenture 鈥� A subordinate debenture is also an unsecured loan with the difference that they are not highly ranked and subordinated debts. The yield to maturity for this loan would be 7.76%.

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Most popular questions from this chapter

Tyson Iron Works is about to go public. It currently has after-tax earnings of \(4,400,000, and 4,200,000 shares are owned by the present stockholders. The new public issue will represent 500,000 new shares. The new shares will be priced to the public at \)25 per share with a 3 percent spread on the offering price. There will also be $280,000 in out-of-pocket costs to the corporation.

a. Compute the net proceeds to Tyson Iron Works.

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Discuss how an underwriting syndicate decreases risk for each underwriter and at the same time facilitates the distribution process.

Question: The Bowman Corporation has a \(18 million bond obligation outstanding, which it is considering refunding. Though the bonds were initially issued at 10 percent, the interest rates on similar issues have declined to 8.5 percent. The bonds were originally issued for 20 years and have 10 years remaining. The new issue would be for 10 years. There is a 9 percent call premium on the old issue. The underwriting cost on the new \)18,000,000 issue is \(530,000, and the underwriting cost on the old issue was \)380,000. The company is in a 35 percent tax bracket, and it will use an 8 percent discount rate (rounded after-tax cost of debt) to analyze the refunding decision.

c. Calculate the net present value.
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