1 Dairy Corp has a 20 million bond obligation outstanding an

1. Dairy Corp. has a $20 million bond obligation outstanding and a coupon rate of 8%. Dairy Corp. has the ability to buy back the debt at 7% above par and issue new debt at 6.5%, so it is considering refunding this bond.Assume the underwriting cost for the old issue was $100,000 and the new issue is $200,000, with a tax rate of 40%. What is the net cost of call premium? A.$1,300,000 B.$840,000 C.$560,000 D.$1,040,000

12.A Eurobond may be A.bond payable in the investor\'s currency but sold outside the borrower\'s country. B.bond payable in the investor\'s currency but sold inside the borrower\'s country. C.bond payable in the borrower\'s currency and sold inside the borrower\'s country. D.bond payable in the borrower\'s currency but sold outside the borrower\'s country.

13.From an investors’ point of view, when is the best time to own a floating rate bond? A.When the bond sells for a discount. B.When interest rates are expected to fall. C.When interest rates are expected to rise. D.Any time, the interest rate fluctuations don’t affect the floating rate bond.

14.Which of the following statements regarding the June 2009 bankruptcy of General Motors (GM) is false? A.The government provided more than $50 billion in the bailout. B.The common stockholders received no cash. C.The U.S. government still owns some of the common stock of GMas of 2014. D.The secured debtholders were paid off in full.

15.Floating rate bonds A.have interest payments based on some overall market rate. B.have a better capacity for constant market value. C.usually have very broad limits that interest payments cannot exceed. D.All of these options are correct.

Solution

Ans 1) call premium = 7% of 20 Million = 1.4 million

net cost of call premium = call premium * (1 - tax rate)

= 60% of 1.4 Million = $840000

Correct answer is option B

Ans 12) D.bond payable in the borrower\'s currency but sold outside the borrower\'s country.

Ans 13) Correct option is C when interest rates are expected to rise because it floating rate instruments provide safety at this scenario.