Question: Jonah Fitzpatrick would like to start investing and is considering

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.
Required:
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?

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  • CreatedJune 12, 2015
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