Please read the article "Microsoft's Bond Sale Is Largest of the Year" by Mike Cherney below

Answer all THREE questions in full.

1. Why do software companies and drug makers tend to have low levels of debt?

2. Why did Microsoft issue such a large size of bond even though it doesn't appear to need the cash? What capital structure theory presented in the textbook can explain this issuance.

3. Compared to Apple, Microsoft's bond has a higher or lower rating? Is the yield on the bond of Microsoft compared to the yield on the bond of Apple consistent with the implication of the bond rating?

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Microsoft Corp. MSFT -0.08% is outshining Apple Inc. in at least one area: bond sales.

The software giant on Monday completed the largest U.S. corporate-bond sale this year, selling $10.75 billion in debt with maturities of five to 40 years. The sale surpasses a pair of megabonds issued last week, an $8 billion sale by drug maker Merck & Co. and a $6.5 billion deal from electronics titan Apple.

Investors on Monday lined up to purchase debt from the Redmond, Wash., company, prompting Microsoft to boost the size of the sale from $7 billion, according to S&P Capital IQ LCD. The company is one of the few U.S. firms with a pristine triple-A credit rating, reflecting strong profitability and a light debt load.

Investors expect big companies like Microsoft, Apple and Merck to tap the bond market in size this year, even though many dont immediately appear to need the cash. Companies are taking advantage of attractive borrowing costs following a sharp decline in some developed economy government-bond yields, while investors are seeking out securities that offer higher yields than ultrasafe U.S. debt.

Microsofts bond sale Monday fits the pattern of investment-grade corporate issuers who, even if they dont need to raise capital, are taking advantage of very, very favorable financing terms, said Jim Kochan, chief fixed income strategist at Wells Fargo Funds Management.

Many of the largest bond issuers, including Apple and Microsoft, have large cash reserves that were earned overseas and would be subject to U.S. taxes if repatriated. Company executives are finding it more cost-effective to borrow money in the U.S. bond markets at the low rates currently available than bringing the money home.

Apple could sell its first bond denominated in Swiss francs on Tuesday. The company last year sold 2.8 billion ($3.16 billion) of debt in euros. Yields on developed-country government debt in Europe, where the European Central Bank recently announced a bond-buying stimulus program in response to sluggish economic growth and falling inflation, are even lower than in the U.S.

Even in the often-staid bond market, Apple can still garner excitement among investors. The company is the largest in the world by stock-market value and recently reported a record $18 billion profit for the latest quarter, an increase of 38%. Its $17 billion bond sale in April 2013 was the largest on record at the time, before it was surpassed that year by $49 billion from Verizon Communications Inc.

Microsoft is coming off a tougher quarter in the latest period. Sales of software to corporations, including Windows, Office and computer-server products, came in below analyst expectations. Net income fell compared with the same period last year.

Zachary Chavis, a portfolio manager at Sage Advisory Services, which oversees $11 billion, sat out Microsofts bond sale on Monday but said his firm planned to buy some of the new bonds in the coming days. The fact is theres not a lot of triple-A paper out there, he said.

Microsofts bond sale Monday is its first since 2013, according to data provider Dealogic. The company said it would use proceeds from the sale for general corporate purposes, which could include stock buybacks, capital expenditures and repaying existing debt. Moodys Investors Service noted the company plans to complete its remaining $31 billion share buyback program by the end of December 2016.

Unruly Campaign Tag : WSJ : Chase INK - Jan 2017

Microsoft shopped its bond at lower relative yields than Apples sale last week. On Monday, Microsoft offered a 10-year bond to yield 0.75 percentage point more than benchmark Treasurys. The 10-year Microsoft bond priced at a yield of 2.724%.

Apple, which is rated one notch below Microsoft at double-A-plus, last week sold 10-year bonds to yield 0.85 percentage point more than Treasurys.

The 10-year U.S. Treasury note on Monday closed at a yield of around 1.98%, up from 1.64% it hit last month but down from 3% toward the end of 2013. Bond prices rise when yields fall and vice versa.