Question

Discuss what effect you would expect the following debt provisions to have on the yield that corporations must offer investors: funded (versus unfunded) debt, sinking fund, call provision, subordinated debt, secured debt.

Answer 1

At the time positive return or even mere uncertainity over future interest rate would expected debt fund to require high return than liability.

An investor expected to earn less return if debt has a sinking fund.It reduce risk od debt by reducing uncertainity over whether the firm raise principal amount for repayment.

In Debt has call provision will be increase return that lead to investor hold the bond. So investor can no longer they collect expected return on until maturity.

The subordinate debt is less secure than other investment so this investors expected to high return.At the time of bankrupty this investors will join firm general creditors.

Secured debt investors has expected low return than subordinate debt, due to collateral value and should not go the value of security.