Question

Slush Corporation has two bonds outstanding, each with a face value of $2 million. Bond A is secured on the company’s head office building; bond B is unsecured. Slush has suffered a severe downturn in demand. Its head office building is worth $1 million, but its remaining assets are now worth only $2 million. If the company defaults, what payoff can the holders of bond B expect?

Answer 1

Answer:

$1 million

Explanation:

The amount of payoff that holders of bond B should expect is the total amount  realizable when the assets are disposed of minus the value of secured bond A of $2  million.

The amount realizable is the worth of the office building which is $1 million plus the worth of other assets at $2 million.

The rationale here is that  bond A is secured on the office building which is worth $1 million,hence from the cash realizable thereafter both bonds have equal standing of $1 million each