RE: Chapter 17, Quiz #11

Goldfarb, Richard ( (no email) )
Thu, 27 Aug 1998 15:13:24 -0400

Be careful. All of the debtholders require a higher rate of return now
- there's no distinction between the "old" and the "new" debt (there
would be only if there was a difference in seniority, etc.). The market
value of the old debt decreases. The old debtholders don't have any
control over this. They hold bonds, and those bonds are worth less in
the market. That's all there is to it.

So when the text says that the debtholders mark the existing debt down
to 70M, all they mean is that they recognize that the value of the debt
has fallen. It isn't something they do out of choice. The value
declines and they recognize that fact.

> -----Original Message-----
> From: Nabila Audi [SMTP:naudi@ins.state.pa.us]
> Sent: Thursday, August 27, 1998 2:54 PM
> To: Brian Viscusi; studygroup5b@lists.casact.org
> Subject: Re: Chapter 17, Quiz #11
>
> I'll try to answer this from my understanding:
>
> 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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