Why would this haapen? Is it a common occurence? I really don't follo=
w
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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I think that when they talk about debtholders' reducing the
value of the existing debt, they are saying that the expected
value of the bonds is decreased because the likelihood of
default has been increased. While the promised value of
the debt has not changed, the ability of the firm to repay the
bonds has been reduced because it has assumed more
debt.
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