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Foundations Of Financial Management
Found in: Page 524
Foundations Of Financial Management

Foundations Of Financial Management

Book edition 16th
Author(s) Stanley B. Block, Geoffrey A. Hirt, Bartley Danielsen
Pages 768 pages
ISBN 9781259277160

Short Answer

Discuss the relationship between the coupon rate (original interest rate at time of issue) on a bond and its security provisions. (LO16-1)

The greater protection is given to the bondholders' class, the lower the interest rate.

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Step by Step Solution

Secured debt

Secured debts refer to that variety of debts in which a corporation pledged some of its specific assets to the bondholders. Assets are pledged for providing security in case of default.

Relationship between coupon rate on bonds and associated security provisions

Generally, when a corporation provides greater protection or pledges its greater assets to the bondholders, the lower coupon rate is offered on the bonds.

The bondholders are willing to assume some degree of risk to receive a higher yield.

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