The decision can include any or all of these bond features, but analysis of each feature will help ascertain the best options. Evaluation and Comparison of Alternative Solutions A coupon rate is the annual coupon dividend by the face value of a bond (Ross, et al., 2016) . In other words, it is the rate that will be sued to determine the periodic interest payments that the bondholder will receive based on the face value of the bond (Ross, et al., 2016). This is important to understand because many of the features of a bond and their underlying advantages and disadvantages are based on the coupon rate. Based on the memo written by Suzanne’s assistant, there are disadvantages and advantages to each of the many bond features. In the case where the bond possesses security such as collateral then the coupon rate of the bond is low because the collateral acts as security which forms lowered risk (Ross, et al., 2016). A seniority of bond also generally possesses a
Mini Case Analysis #2 4 lower coupon rate also because they have less risk but now its based on a lowered threat of default. In a case where the organization defaults than the amount will more likely be recovered against the assets (Ross, et al., 2016). The presence of sinking fund will generally result in a reduction in the coupon rate, because tis a partial guarantee to the bondholder, which is beneficial to Tuxedo Air because it becomes more marketable (Ross, et al., 2016). A provision pertaining to a specific date of call and price would result in increase in the rate of coupon. The call provision would only be used when it is to the company’s advantage, which leads to the bondholders’ disadvantage (Ross, et al., 2016) . The demerit is the higher coupon rate, but also this is less marketable to investors as bondholders. A deferred call will result in decrease rate of coupon relative to a call provision with deferred call. The disadvantage underlying deferred call is the failure on the part of the company to call the bonds during the period of call protection, thus offering bondholders protection for this period (Ross, et al., 2016). A call provision which stands to be Canada plus generally possess 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 positive covenant on the other hand would generally decrease the rate of coupon. The presence pertaining to the positive covenants generally provides protection to the holder of bond by pressurising the company to take into consideration certain actions that would result in benefit to the bondholder (Ross, et al., 2016). The disadvantage underlying positive covenants is the restriction that company has while undertaking any action. A negative covenant on the other hand would result in increase the coupon rate because the benefit lies with the company putting the bondholders at a disadvantage and using a higher coupon rate as leverage to the disadvantage (Ross, et al., 2016). B onds with a conversion feature would usually have lower coupon rates
Mini Case Analysis #2 5
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- Spring '17