1. Explain how credit risk would effect a bond’s rating and ultimately the bond’s market price. How would the following affect the credit risk of a bond and why:

a. The bond has a sinking fund

b. The bond is subordinated to other debt

c. The bond is secured by collateral

2. Suppose Warrior Industries, located in the U.S sell 10,000 laser tips monthly to Blastronics, its UK subsidiary, at the unit price of $15. The U.S tax rate is 45% and the UK tax rate is 50%. In addition, Blastronics must be an ad valorem tariff of 12% on its import. IF the transfer price on tips can be set anywhere between $11 and $18, what will be the change in total taxes paid by both Warrior and Blasttronics by switching to the optimal transfer price?

A. $300 increase in taxes

B. $300 reduction in taxes

C. a $400 increase in taxes

D. A $400 reeduction in taxes