Question

1. How does collateral affect the interest rate on a bond? How does subordination affect the interest rate on a bond too? What else might affect the interest rate on a bond? 2. What is liquidation and reorganization? When should each be used? Please choose one company that has gone through either type of bankruptcy proceeding and describe the circumstances leading up to the filing.

Answer 1

Answer(1): Collateral- It is something that secures a loan and guarantees the repayment of loan.

Effect of collateral on interest rate on bond- If there is no collateral or collateral with a bond then the bond will be riskier and company has to offer higher interest rate on bond, on the other hand if there is 100% or partial collateral with bond, its repayment rating will increase and risk of default will be minimum then company can offer less interest rate on bonds.

Answer(2): Liquidation- It is a process of liquidating(selling) assets of the company for repaying the loan to creditors. This is done when a business gets liquidated or a company gets insolvent.

Reorganization- It is a process of revival. It is a process of increasing life of company which is facing bankruptcy situation. Under the reorganization, company's tax structure is changed. It also includes the change in structure of company by merger and acquisition.