Question

Slush Corporation has two bonds outstanding, each with a face value of $3.7 million. Bond A is secured on the company’s head office building; bond B is unsecured. Slush has suffered a severe downturn in demand. Its head office building is worth $1.17 million, but its remaining assets are now worth only $2 million. If the company defaults, what payoff can the holders of bond B expect?

Answer 1

Answer:

Secured Bond- It is a type of bond that is secured by some asset or other collateral. If company defaults in repaying the secured debt, its asset can be sold and payment of secured debt can be made.

Payment of Bond A (secured) will be made by selling the collateral asset (head office building) worth $1.17 Million, remaining amount will be paid to Bond B holders that is $2 million.

Total bonds' face value = $3.7 million out of which $1.17 million was paid to Secured bond A now remaining Bond B is worth $2.53 Million but remaining assets are $2 million so $2 million will be paid to Bond B holders.