Answer the following questions:
- If a corporation’s bonds are unexpectedly given a downgrade (e.g., Moody’s lowers the rating on Brady Corp. Bonds to Baa from Aa), what do you expect will happen to the yield to maturity on Brady’s bonds?
- What is a call feature in a debt issuance? Is this beneficial to the corporation issuing the bond, the bond investor, or both? Explain.
- Assuming everything else is the same, which bond would have a lower coupon rate at issuance: one with a sinking fund provision or one without a sinking fund provision? Why?
- What is the difference between the coupon rate of a bond and the yield to maturity of a bond? Which rate is more important and why?
- What is a preemptive right as it relates to common stock? Which investor would value preemptive rights more, Benjamin Solowitz who owns .0001% of the shares of XYZ Inc., or Carl Icahn who owns 50.1% of the shares of XYZ Inc.? Why?
- Why do firms accept underpricing of their initial public offerings (IPOs)?
