I do not think that the existing debtholders are the ones who lower the
value of the existing debt, it would not make sense for people to willingly
lower the value of anything they hold. I think what happens is that the
'potential' debt holder get scared of the more debt that the company is
putting itself into and so require higher return on those bonds.
higher return --> lower price. remember that stockholders and bondholders
are waiting for any piece of info. out there to value what they want to
buy. if the bond is going to be more risky soon, i am not going to pay
high price for it now only to discover next week after the issue of the new
bonds that it is worth less.
does this make sense?
Nabila :)
At 10:23 AM 8/27/98 PDT, Brian Viscusi wrote:
>In quiz question # 11 of chapter 17 on page 470 it says, "Debtholders,
>seeing the extra risk, mark the value of the existing debt down to $70
>million."
>
>Why would this haapen? Is it a common occurence? I really don't follow
>the logic. Since it is known that there is going to be more debt
>issued, why lower the current amount of debt? Wouldn't this make the
>equity less risky for no reason at all prior to the extra debt being
>issued.
>
>I can answer the questions to this problem, but I just don't understand
>why or how "marking the value of the debt" down occurs? Any insight on
>this problem would be appreciated.
>
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