The CFO of Chesapeake recently completed a deal to secure a $4 billion revolving

Question

The CFO of Chesapeake recently completed a deal to secure a $4 billion revolving line of bank credit by pledging almost all of the firm's assets. The market price of CHK 6.125% 2/2021 bonds rose from around 30 to just over 50 when the deal was announced. Which of the statements below is the most reasonable interpretation for the market's bond price move?

A.   The market has dramatically increased its estimate of the bond's Recovery value (should a default occur).
B.    The market has dramatically increased both its estimates of the bond's probability of payment as well as its Recovery value (should a default occur).
C.    The market has dramatically increased only its estimate of the bond's probability of payment.
D.   none of the above

Explanation / Answer

correct option is "B" -The market has dramatically increased both its estimates of the bond's probability of payment as well as its Recovery value

The bond value is increased as well as since bank has taken a huge line of credit pledged with asset ,there is a default risk on behalf of organisation for non payment of debt and interest

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