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If a corporation issues (makes new and sells) a bond with a 30-year maturity, a lot can happen during those 30 years. And if the
If a corporation issues (makes new and sells) a bond with a 30-year maturity, a lot can happen during those 30 years. And if the corporation guesses at the YTM with a CR of, say, 8.5%, there's a lot of room for future economic interest rates to either rise or fall. And if interest rates significantly fall, then this corporation could be stuck paying 8.5% for 30 years, when the new economy might have them paying even 4.0%, if they could reset that CR (which they can't). That'd be awful! What can a bond-issuing corporation do to protect themselves against the possibility of locking in a 30-year high-interest bond coupon rate? (The answer is one of the definitions of the chapter's section "Terminology and Characteristics of Bonds.")
If a corporation issues (makes new and sells) a bond with a 30-year maturity, a lot can happen during those 30 years. And if the corporation guesses at the YTM with a CR of, say, 8.5\%, there's a lot of room for future economic interest rates to either rise or fall. And if interest rates significantly fall, then this corporation could be stuck paying 8.5% for 30 year's. when the new economy might have them paying even 4.0%, if they could reset that CR (which they can't). That'd be awful! What can a bond-issuing corporation do to protect themselves against the possibility of locking in a 30-year high-interest bond coupon rate? (The answer is one of the definitions of the chapter's section "Terminology and Characteristics of Bonds.") Step by Step Solution
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