Chapter 24
Debt Financing
24–1. Explain some of the differences between a public debt offering and a private debt offering.
In a public debt offering, a prospectus is created with details of the offering and a formal contract
24–2. Why do bonds with lower seniority have higher yields than equivalent bonds with higher
seniority?
24–3. Explain the difference between a secured corporate bond and an unsecured corporate bond.
A secured corporate bond gives the bondholder the right over particular assets that serve as collateral
24–4. What is the difference between a foreign bond and a Eurobond?
24–5. Describe the kinds of securities the U.S. government uses to finance the federal debt.
The U.S. government uses treasury bills, note, bonds, and TIPS. Treasury bills are pure discount bonds
24–6. Suppose on January 15, 2013, the U.S. Treasury issued a five-year inflation-indexed note with a
coupon of 4%. On the date of issue, the consumer price index (CPI) was 252. By January 15,
2018, the CPI increases to 317. What principal and coupon payment will be made on January 15,
2018?
24–7. On January 15, 2020, the U.S. Treasury issued a ten-year inflation-indexed note with a coupon of
5%. On the date of issue, the CPI is 414. By January 15, 2030, the CPI index decreases to 282.
What principal and coupon payment will be made on January 15, 2030?
282 1 31.88%.
24-8. Describe what prepayment risk in a GNMA is.
Holders of the GNMA securities face payment risk because homeowners have the option to prepay
24–9. What is the distinguishing feature of how municipal bonds are taxed?
24-10. Explain why bond issuers might voluntarily choose to put restrictive covenants into a new bond
24-11. General Electric has just issued a callable 10-year, 5% coupon bond with annual coupon
payments. The bond can be called at par in one year or anytime thereafter on a coupon payment
date. It has a price of $101. What is the bond’s yield to maturity and yield to call?
24–12. Boeing Corporation has just issued a callable (at par) three–year, 5% coupon bond with
semiannual coupon payments. The bond can be called at par in two years or anytime thereafter
on a coupon payment date. It has a price of $99. What is the bond’s yield to maturity and yield to
call?
