lesson4asssignment2 - Lesson Chapter 7 Assignment #4,...

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Lesson #4, Assignment #2: Chapter 7 Assignment Read the minicase 'Financing S&S Air's Expansion Plans with a Bond Issue' on page 230 of your text; use Word to submit the assignment below. Prepare a memo describing the potential effect of each of the following features on the coupon rate of S&S Air's proposed bond: A rule of thumb with bond provisions is to determine who benefits by the provision. If the company benefits, the bond will have a higher coupon rate. If the bondholders benefit, the bond will have a lower coupon rate. 1. The security of the bond; that is, whether or not the bond has collateral. A bond with collateral will have a lower coupon rate. Bondholders have the claim on the collateral, even in bank- ruptcy. Collateral provides an asset that bondholders can claim, which lowers their risk in default. The downside of collateral is that the company generally cannot sell the asset used as collateral, and they will generally have to keep the asset in good working order. 2. The seniority of the bond. The more senior the bond is, the lower the coupon rate. Senior bonds get full payment in bankruptcy proceed- ings before subordinated bonds receive any payment. A potential problem may arise in that the bond covenant may restrict the company from issuing any future bonds senior to the current bonds. 3. The presence of a sinking fund. 4. A call provision with specified call dates and call prices. A provision with a specific call date and prices would increase the coupon rate. The call provision would only be used when it is to the company’s advantage, thus the bondholder’s disadvantage. The downside is the higher coupon rate. The company benefits by being able to refinance at a lower rate if interest rates fall significantly, that is, enough to offset the call provision cost. 5.A deferred call accompanying the call provision.
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lesson4asssignment2 - Lesson Chapter 7 Assignment #4,...

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