- CFA Exams
- CFA Level I Exam
- Study Session 15. Fixed Income (2)
- Reading 47. Fundamentals of Credit Analysis
- Subject 4. Credit Analysis
CFA Practice Question
A firm intends to take on a significant amount of new debt in order to fund the purchase of a close competitor. However the firm cannot complete the transaction unless it first calls one of its outstanding bond issues. It must be true that the called bonds ______
A. have a higher interest rate than the new bonds will.
B. can be called at a price that is very near par.
C. have covenants which restrict such increase in debt.
User Contributed Comments 4
| User | Comment |
|---|---|
| raner | why not higher interest rate? nonrefundable! |
| PedroEdmundo | Only a negative covenant can prevent the firm from borrowing. |
| MattNYC | I was confused as well. The answer is negative covenants because the question states that the firm wants to issue new debt but cannot do so unless it calls in old debt first - thus implying that a negative covenant holds and the firm is not able to issue new debt and is forced to call in old debt. |
| poomie83 | The firm cannot call in old debt just to issue new debt - the negative covenant prevents this |