Question 1
Suppose a Korean company issues a bond in Canada that is denominated in Canadian dollars. What is this an example of?
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a global bond
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a Maple bond
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a domestic bond
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a Yankee bond
Question 2
Suppose a new company decides to raise a total of $350 million, with $200 million as common equity and $150 million as long-term debt. The debt can be mortgage bonds or debentures, but by an ironclad provision in its charter, the company can never raise any additional debt beyond the original $150 million. Given these conditions, which of the following statements is correct?
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The higher the percentage of debentures the greater the risk borne by each debenture, and thus the higher the required rate of return on the debentures.
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In this situation, we cannot tell for sure how, or whether, the firm’s total interest expense on the $150 million of debt would be affected by the mix of debentures versus first mortgage bonds. The interest rate on each of the two types of bonds would increase as the percentage of mortgage bonds used was increased, but the result might well be such that the firm’s total interest charges would not be affected materially by the mix between the two.
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If the debt were raised by issuing $75 million of debentures and $75 million of first mortgage bonds, we could be certain that the firm’s total interest expense would be lower than if the debt were raised by issuing $150 million of debentures.
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If the debt were raised by issuing $75 million of debentures and $75 million of first mortgage bonds, we could be certain that the firm’s total interest expense would be lower than if the debt were raised by issuing $150 million of first mortgage bonds.
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