Interest Rates and Bond Valuation Case
After Dan's EFN analysis for East Coast Yachts, Larissa has decided to expand the company's operations. She has asked Dan to enlist an underwriter to help sell $45 million in new 30-year bonds to finance new construction. Dan has entered into discussions with Renata Harper, an underwriter from the firm of Crowe & Mallard, about which bond features East Coast Yachts should consider and also what coupon rate the issue will likely have. Although Dan is aware of bond features, he is uncertain as to the costs and benefits of some of them, so he isn't clear on how each feature would affect the coupon rate of the bond issue.
You have been asked to prepare a memo describing the effects and advantages or disadvantages of each of the following bond features on the coupon rate of a 20-year bond:
a. The security or collateral provided with the bond
b. The seniority of the bond
c. A sinking fund provision
d. A call provision
e. Any positive covenants
f. Any negative covenants
g. A conversion feature
h. A floating rate coupon
The firm is also considering whether to issue coupon-bearing bonds or zero coupon bonds. The YTM in either case is expected to be 5.5% per annum. The coupon bond would have a 5.5% per annum coupon payable semi-annually. The company’s tax rate is 35%.