A Sizeable Proportion of Corporate Takeovers Are Financed with So-Called

question 9

Essay

A sizeable proportion of corporate takeovers are financed with so-called junk bonds. Such bonds offer bondholders higher rates of return than most other bonds traded because there are no hard assets as collateral to reduce the risk for bondholders in case of a default. The sellers of the bonds hope to be able to meet their obligations to pay these high rates of return to bondholders through the expected increase in profits of the company(ies) just taken over. How do the monitoring problem and the existence of lazy monopolists contribute to the market for junk bonds?

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Definitions:

Time Constant

The time required for a system to charge or discharge to approximately 63.2% of its maximum value, characteristic of both RC and RL circuits.

R-L

Refers to a circuit that contains both resistance (R) and inductance (L), affecting the phase and amplitude of the circuit's response to an AC input.

Exponential Curves

Graphs representing exponential functions, showing how values can grow rapidly due to constant proportionality rates.

Time Constants

A parameter that quantifies the response time of a system to a step input, notably in RC and RL circuits, characterized by the time it takes for a system to change significantly.