bankruptcy. However, a potential problem may arise when the bond contract limits the company from issuing any future bonds which is more senior than the current bonds (Ross, et al., 2016). A sinking fund decrease the coupon rate because it is a partial assurance to bondholders. It is beneficial to Tuxedo Air because it becomes more in demand. Conversely, the company has to
4 MINI-CASE ANALYSIS #2 make the interim payments into a sinking fund or face default, so they must produce these cash flows. A call provision with specified call dates and call prices will increase the coupon rate. A call provision is an advantage for an organization, but it is a disadvantage for the bondholder’s. The problem with a call provision is the higher coupon rate because the company benefits the lower rate if interest rates fall, so it is required to balance the call provision cost (Ross, et al., 2016). A Canada plus call provision usually have lower coupon rates. If a bond with a Canada plus call provision is called, bondholders receive the market value of the bond, which can be reinvested in another bond with similar features. A deferred call provision will reduce the coupon rate relative to a call provision without a deferred call. It indicates that the company cannot call the bond for a specified period, so it offers the bondholders protection for this period. However, the company cannot call the bond during the call protection period (Ross, et al., 2016). Furthermore, interest rates could drop to the point where it would be beneficial for the company in order to call the bond. A positive covenant will reduce the coupon rate because positive covenants protects bondholders by forcing the company to start actions that benefit bondholders. On the other hand, disadvantage of positive covenant is that the company is limited in its actions. However, the positive covenant may force the company into actions that would rather not undertake in the future (Ross, et al., 2016). On the other hand, a negative covenant will also reduce the coupon
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