Walisa
Manage Discussion Entry
You are Renata’s assistant, and she has asked you to prepare a memo to Dan describing the effect of each of the following bond features on the coupon rate of the bond. She would also like you to list any advantages or disadvantages of each feature.
The security of the bond, that is, whether or not the bond has collateral.
The seniority of the bond.
The presence of a sinking fund.
A call provision with specified call dates and call prices.
A deferred call accompanying the above call provision.
A make-whole call provision.
Any positive covenants. Also, discuss several possible positive covenants East Coast Yachts might consider.
Any negative covenants. Also, discuss several possible negative covenants East Coast Yachts might consider.
A conversion feature (note that East Coast Yachts is not a publicly traded company).
A floating rate coupon.
Dan is also considering whether to issue coupon-bearing bonds or zero coupon bonds. The YTM on either bond issue will be 5.5 percent. The coupon bond would have a 5.5 percent coupon rate. The company’s tax rate is 35 percent.
a) a bond with collateral benefits the bond holders and have a lower coupon rate.
b) The seniority of the bond is inversely related to the coupon rate of the bond.
c) The presence of a sinking fund is beneficial to the bondholders and somewhat burdensome
d) a call provision with specified call dates and call prices will increase the coupon rate.
e) The presence of a deferred call is disadvantageous to the company cannot call the bond for a specified period
f) a whole call provision, the bondholder will be repaid with the present value of the future cash flow. A call provision lowers the coupon rate when compared to a call provision.
g) The presence of a positive covenant protects the bondholders by forcing the company to undertake actions that benefit the bondholders.
h) a negative covenant protects the bondholders by restricting the company from doing certain actions
i) The conversion feature means the feature of the bonds even though the company is not publicly traded company reduces the coupon rate
j) a floating rate coupon is that whose interest rate is not fixed. It is flexible to market conditions.
How many of the coupon bonds must East Coast Yachts issue to raise the $45 million? How many of the zeroes must it issue?
Number of coupon bonds = bond issue/ face bond of value
45,000,000/1000 = 45,000
bond issue =fund required x (1+market rate) ^ years to maturity
bond issue=45,000,000x (1+5.5%)^30=224,277,808
number of coupon bond = bond issue/ face value bond 224,277,808/1000=224,278
In 30 years, what will be the principal repayment due if East Coast Yachts issues the coupon bonds? What if it issues the zeroes?
amount to be raised/face value of each bond
The principal repayment will be 45 million only, where as in the case of zero coupon bonds it will be $224, 277, 808
What are the company’s considerations in issuing a coupon bond compared to a zero coupon bond?
If the company will be able to achieve the interest payment of the coupon bond then it they should take into consideration that the zero coupon bond are the better option. Zero coupon bond does not require any payment until maturity of the bond.
U.S. Securities and Exchange Commission. “Zero Coupon Bond” https://www.investor.gov/introduction-investing/investing-basics/glossary/zero-coupon-bond
Ross, Stephen. Corporate Finance: Core Principles and Applications. Available from: VitalSource Bookshelf, (5th Edition). McGraw-Hill Higher Education (US), 2017.