Using a Word document, complete the requirements of the Mini-case “Financing S & S Air’s Expansion Plans with a Bond Issue” on page 238 in the textbook in the form of a memo, as explained in the case.For each of the ten bond features listed, briefly describe the likely impact of each of the features on the coupon rate demanded by potential bond investors when this new bond is issued. Will it cause the necessary coupon rate to be higher or lower?
In addition, for each of the ten bond features listed, briefly describe the advantages or disadvantages, from the company’s perspective, of implementing that feature with the newly issued bond.
Financing S&S Air’s Expansion Plans with a Bond Issue
Mark Sexton and Todd Story, the owners of S&S Air, have decided to expand their operations. They instructed their newly hired financial analyst, Chris Guthrie, to enlist an underwriter to help sell $35 million in new 10-year bonds to finance construction. Chris has entered into discussions with Renata Harper, an underwriter from the firm of Raines and Warren, about which bond features S&S Air should consider and what coupon rate the issue will likely have.
Although Chris is aware of the bond features, he is uncertain about the costs and benefits of some features, so he isn’t sure how each feature would affect the coupon rate of the bond issue. You are Renata’s assistant, and she has asked you to prepare a memo to Chris describing the effect of each of the following bond features on the coupon rate of the bond. She would also like you to list any advantages or disadvantages of each feature.
QUESTION
The security of the bond—that is, whether the bond has collateral.
The seniority of the bond.
The presence of a sinking fund.
A call provision with specified call dates and call prices.
A deferred call accompanying the call provision.
A make-whole call provision.
Any positive covenants. Also, discuss several possible positive covenants S&S Air might consider.
Any negative covenants. Also, discuss several possible negative covenants S&S Air might consider.
A conversion feature (note that S&S Air is not a publicly traded company).
A floating-rate coupon.