Question

Give an example of why a company like Sincere Stationery Corporation would issue debt at 12 percent interest in today’s interest rate environment?

Answer 1

A company with a poor credit rating pays a higher interest rate to compensate buyers for the additional risk they are taking lending their money to a firm with a bad financial history. These are high risk speculative bonds and are known as junk bonds. A high yield bond comes with higher default risk. So a company like Sincere Stationery corporation would issue debt with an interest rate as high as 12 % to attract investors who have a higher risk appetite and can be compensated by the additional risk premium .i.e the yield over and above the risk free rate.

Example: Carnival priced $4 billion in bonds maturing in 2023 with a yield at par value of 11.5%, it said in a statement. While Carnival is deemed investment grade by rating agencies, demand for the deal came largely from investors in junk-rated debt given the imperiled state of the cruise industry, the sources said. (SOURCE - Reuters)