1. Primary Market. The Treasury uses the primary market to obtain adequate funding by issuing Treasury bills through a weekly auction. Investors can submit competitive bids, where the Treasury will accept the highest bids first. Alternatively, investors can submit noncompetitive bids, which will automatically be accepted. The price to be paid by noncompetitive bidders is the weighted average price of accepted bids.
4. Commercial Paper. A.) Commercial paper is usually issued only by well-known, credit-worthy firms. B.) Financial institutions such as finance companies and bank holding companies are major issuers of commercial paper. C.) Companies that issue commercial paper may decide to establish a department that can directly place the paper. In this way, the firms can avoid the transactions costs incurred when commercial paper dealers issue commercial paper. Such a strategy is only worthwhile if the firms frequently borrow in this manner.
5. Commercial Paper Ratings. Ratings agencies assign ratings to commercial paper because the rating serves as an indicator of the potential risk of default.
1. Bond Indenture. A.) A bond indenture is a legal document specifying the rights and obligations of both the issuing firm and the bondholders. B.) A trustee represents the bondholders in all matters concerning the bond issue, including the monitoring of the issuing firm's activities to ensure compliance with the terms of the indenture.
2. Sinking-Fund Provision. A.) A sinking-fund provision is a requirement that the firm retire a certain amount of the bond issue each year. B.) This reduces the payments necessary at maturity and therefore can reduce the risk of investors.
4. Call Provisions. A.) A call provision normally requires the firm to pay a price above par value when it calls its bonds. B.) Call provision can affect the price of a bond in two ways: a lower price for calling the bonds to meet sinking-fund requirements and a higher price...