Active TopicsActive Topics  Display List of Forum MembersMemberlist  Search The ForumSearch  HelpHelp
  RegisterRegister  LoginLogin
BEC STUDY GROUP
 CPAnet Forum : BEC STUDY GROUP
Subject Topic: BEC-Net present value (Topic Closed Topic Closed) Post ReplyPost New Topic
  
Author
Message << Prev Topic | Next Topic >>
Usagi
Newbie
Newbie


Joined: 13 Nov 2011
Online Status: Offline
Posts: 28
Posted: 18 Dec 2011 at 05:14 | IP Logged  

Does anyone please help me to understand this?
I can't understand why the limit of debt increase interest rate on the bonds being sold?

Bisk 51-63 85

What would be the primary reason for a company to agree to a debt covenant limiting the percentage of its long-term debt?

a. To cause the price of the company's stock to rise
b. To lower the company's bond rating
c. To reduce the risk for existing bondholders
d. To reduce the interest rate on the bonds being sold

The answer is d,

A debt covenant is a promise to debt holders. By promising to limit the percentage of its long-term debt, the debtor assures debt holders that, even in a period of economic strain, there will be sufficient resources to make interest payments. This risk reduction makes the debt more attractive than similar instruments with the same terms except for the debt covenant, making its cost (interest rate) lower.

Back to Top View Usagi's Profile Search for other posts by Usagi
 
ramplacentia
Newbie
Newbie
Avatar

Joined: 06 Dec 2011
Location: United States
Online Status: Offline
Posts: 37
Posted: 19 Dec 2011 at 15:25 | IP Logged  

Long term debts are given based on the security(assets) offered by the company. As asset values can diminish over a period time, lenders would like to secure their loans by restricting claims on the property by any other lenders.

In other words, lenders restrict the ability of the company to borrow further.



__________________
BEC
Back to Top View ramplacentia's Profile Search for other posts by ramplacentia
 
CPA1979
Regular
Regular
Avatar

Joined: 02 Aug 2010
Location: United States
Online Status: Offline
Posts: 210
Posted: 19 Dec 2011 at 22:42 | IP Logged  

couldn't have said it better ramplacentia!!!

Usagi,
How do you like the Bisk book??? A friend recommended it to me but I'm
hesitant to spend more money on my last section.

__________________
FAR 11/10 80!!
AUD 10/11 93!!
BEC 01/12 77!!
REG 11/11 79!!
Ethics 3/12 93!!
CPA in IL
Back to Top View CPA1979's Profile Search for other posts by CPA1979 Visit CPA1979's Homepage
 
Usagi
Newbie
Newbie


Joined: 13 Nov 2011
Online Status: Offline
Posts: 28
Posted: 20 Dec 2011 at 06:23 | IP Logged  

Dear Ramplacentia,

Thank you for your explanation. I got it!

Dear CPA 1979

I like Bisk more than Wiley. I started with Wiley first but the letter was too small so I changed to Bisk! It's very hard to read Wiley's letter because of the size of the font.But it's easier to carry Wiley because each section can be separated.

Thank you,
Usagi



Back to Top View Usagi's Profile Search for other posts by Usagi
 
cpanet
Admin Group
Admin Group
Avatar

Joined: 01 Oct 2003
Online Status: Offline
Posts: 2572
Posted: 20 Jun 2017 at 02:56 | IP Logged  

You can find more debt covenant discussion here:

http://plus.cpaexamclub.com/post/6291194/debt-covenants-bec- notes


Subscribe / Log In:
http://www.cpaexamclub.com/plus.html

__________________
CPA Exam Club / PLUS / Facebook Study Groups
Back to Top View cpanet's Profile Search for other posts by cpanet Visit cpanet's Homepage
 



Sorry, you can NOT post a reply.
This topic is closed.


  Post ReplyPost New Topic
Printable version Printable version

Forum Jump
You cannot post new topics in this forum
You cannot reply to topics in this forum
You cannot delete your posts in this forum
You cannot edit your posts in this forum
You cannot create polls in this forum
You cannot vote in polls in this forum

Powered by Web Wiz Forums version 7.9
Copyright ©2001-2010 Web Wiz Guide

This page was generated in 0.1250 seconds.

Copyright © 1996-2016 CPAnet/MizWeb Communities All Rights Reserved
Twitter
|Facebook |CPA Exam Club | About | Contact | Newsletter | Advertise & Promote