S&P has previously given a BBB rating on On-The-Bubble Corporation. Today, On-Th

Question

S&P has previously given a BBB rating on On-The-Bubble Corporation. Today, On-The-Bubble Corporation’s investment banker gives the company’s CFO a frightening call. After talking over the prospective deal with S&P, this banker thinks that there’s a risk that S&P will rate On-The-Bubble’s next issue at BB.

If the downgrade does occur, do you think On-The-Bubble Corporation could still fund this same project by issuing $100,000,000 in par value of new 10-year maturity, 0% coupon rate senior unsecured bonds? (A, B, C, or D?)

A. Yes. Downgrades are common and investors would forgive the company.

B. No. The market would be closed to On-The-Bubble.

C. Yes. A new class of high-yield bond investors would be happy to buy On-The-Bubble’s debt.

D. No. On-The-Bubble would have to issue more than $100,000,000 in par value.

Explanation / Answer

answer d

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