free themselves from further coupon payments at their own accord (Ross, et al., 2016, pp.235). Although the business has yet to reach the stage of an IPO, if Tuxedo ever became publicly traded, a convertible bond issue would be a potential option. Convertible bonds can be swapped for a fixed number of shares at any time before maturity at the holder’s discretion and allow them to profit of the issue’s equity gains (Ross, et al., 2016, pp.241). This may seem more beneficial to the holder but the entity who issues these bonds would no longer have to pay the coupon rates for the converted bonds. For the time being, Tuxedo Air Inc. would be most suited for a bond issue with relatively low coupon rates and short term maturity length in order to finance their upcoming expansion.
MINI CASE ANALYSIS 2 Appendix A Memo to Ed Cowan Subject: Review of Bond Features 1. Security of the bond. If the bond holds collateral or is backed by an actual asset such as cash or physical property, the bond will usually have a higher coupe rate. This leads to less risk and is beneficial for the holder. Vice-versa is true for unsecured bonds. 2. Seniority of the bond. Seniority refers to the order of repayment in the event of a sale or bankruptcy of the issuer. The more senior a bond is, the lower the coupon rate will be due to less threat of default. This can be beneficial however, in the event of default it is more likely for senior bonds to have their total value retrieved against the investment. 3. Presence of Sinking Fund. Sinking funds reduce the coupon rate and risk because they act as a partial guarantee to holders. The drawback is that the holder must make interim payments into the sinking fund meaning the company must have the necessary cash flows for these payments. 4. A provision with a specific call date and prices. Provisions of this nature lead to a higher coupon rate. The specified call date works in the issuer’s advantage, but the holder‘s disadvantage. The one drawback to the issuer is the higher coupon rate. 5. A deferred call. This bond feature is almost the opposite of the previous. Bond’s cannot be called for a specified period of time, which reduces the coupon rate and provides protection to the holder.
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- Spring '17
- Finance, Tuxedo Air