Chastity bond is a type of corporate bond that is redeemed at face value in the event that raises the acquisition cost for a potential buyer. An example of such events is a hostile takeover and change of control over an issuer.
Often, chastity bonds are issued when a potential buyer makes a public announcement of their intentions for an upcoming acquisition. This type of paper is issued based on the assumption that if a large bond issue is redeemed early during an acquisition, the acquirer will have to pay excessively for the deal.
1) If the initial rate for the purchase of a company is significantly lower than the cost that the acquiring company will ultimately be willing to pay for the transaction, then the additional cost of redeeming the Chastity bond will be an insignificant obstacle for a potential buyer;
2) Increasing a company’s debt can help deter a hostile acquisition. However, in the long run, this overbalance of debt on the balance sheet could leave the company potentially vulnerable to a future hostile acquisition. As in a weakened state, it may lack the financial stability to maintain its independence.
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