How does collateral affect the interest rate on a bond? What else might affect the interest rate on a bond?
Collateral plays a central role in decreasing the default risks on a bond. In other words, the decrease in risk translates to a decrease in the required yield or interest rate on bonds. On the other hand, subordination occurs when a debt holds the second position or does not hold priority. In this sense, subordination makes bonds risky, meaning the interest rate attached to a bond remains high. Another of the factors that affect a bond’s interest rate is market interest rate (MIR) (John, Lynch, & Puri, 2013) . An increase in market interest rate makes the bond’s coupon rate less attractive to individual investors, which means they can only pay less for such bonds.
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What is Chapter 7 liquidation and Chapter 11 reorganization? When should each be used? Please choose one company that has gone through either type of bankruptcy proceeding and describe the circumstances leading up to the filing.
Bankruptcy law provides individuals and firms with two types of relief, including liquidation and reorganization or rehabilitation. Chapter 7 liquidation allows bankruptcy trustees to collect the debtors’ non-exempt properties with the sole purpose of converting the same into cash, which, in turn, benefits unsecured creditors (Clark, Hanson, & Smith, 2015). Chapter 7 is used when the debtor does not have to file a repayment plan.
Chapter 11 bankruptcy allows debtors to restructure their businesses. In most cases, it applies to commercial entities, including corporation, as well as individuals with complex debts. Reorganization is often used when the creditor intends to retain the debtor’s assets if the bankrupt debtor has pledged to pay off debts in line with the plan provided by the court (Clark, Hanson, & Smith, 2015). One of the companies that filed for Chapter 11 reorganization is Sears; given the company sought protection when it suffered staggering losses in addition to massive debt load.
References
Clark, L., Hanson, R., & Smith, J. (2015). Bankruptcy reform is here. Journal of Accountancy .
John, K., Lynch, A., & Puri, M. (2013). Credit ratings: Collateral, and loan characteristics: implications for yield. SSRN Electronic Journal, 76 (3): 371-410.
