Jonah Fitzpatrick would like to start investing and is considering purchasing some of the bonds being issued by Jennings Financial. Details of the bond issue were outlined in a recent article in Financial Times Magazine. The following is an excerpt from the article:
Jennings Financial is planning to issue a series of bonds to help finance the acquisition of a large manufacturing facility. In consultation with its investment bankers, the company has decided to issue $100 million of 8%, five-year bonds. Each bond will be denominated at $1,000. The bonds will be classified as senior debenture bonds and will be sold to yield a return of 10%. Because this is such a large issue, the investment banker is required to underwrite the issue. However, given the company’s historical performance and financial strength, a syndicate is willing to guarantee the entire issue.
Jonah is unfamiliar with bond issues and approaches Mike Scullino, his stockbroker, with some basic questions.
Jonah: I’ve always invested in equity securities, Mike, but I want to consider investing in the bonds being issued by Jennings Financial. I know very little about bonds, though, so I have a few questions.
Mike: Sure thing, Jonah. Just e-mail your questions and I’ll get back to you later today.
Jonah has just sent Mike the following e-mail. Draft an appropriate response.
Mike, here are my questions on the Jennings bonds. I look forward to hearing from you.
1. The advertisement for the bond issue states that the bonds will be 8% bonds but will yield 10%. Why are there two interest rates? Which interest rate should I use to determine how much I’ll earn on the bonds?
2. What are debenture bonds? Will I have any security if the company defaults on these bonds?
3. What is the role of the investment banker? What does it mean to use a syndicate?
4. What if I need my money back before the end of the five-year period? Does the five-year term mean that I would be locked into this investment for five years?