A bank has issued $5,000,000 in long term debt and since that time interest rates have risen so that it will only cost the bank $3,000,000 to buy the long term debt back.The bank decides to issue $3,000,000 in new stock and use the proceeds to retire the long term debt.What way of meeting their capital needs is the bank taking?

Question

Quizplus · Accepted Answer

The bank is swapping stock for debt instruments. By issuing $3,000,000 in new stock and using the proceeds to buy back $5,000,000 in long term debt, the bank is essentially swapping out its debt for equity. This can benefit the bank by lowering its overall debt levels and reducing the interest payments it must make, while also leveraging equity to meet its capital needs.

A Bank Has Issued $5,000,000 in Long Term Debt and Since