After Dan’s EFN (external funds needed) analysis for East Coast Yachts, Larissa had decided to expand the company’s operations. She has asked Dan to enlist an underwriter to help sell $50 million in new 20-year bonds to finance new construction. Dan has entered into discussions with Kim McKenzie, 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.

Question:

You are Kim’s assistant, and she has asked you to prepare a memo to Dan 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 features.

1.The security of the bond, that is, whether or not the bond has collateral.

2.The seniority of the bond.

3.The presence of a sinking fund.

4.A call provision with specified call dates and call prices.

5.A deferred call accompanying the above call provision

6.A make-whole call provision

7.Any positive covenants. Also, discuss several possible positive covenants East Coast Yachts might consider.

8.Any negative covenants. Also, discuss several possible negative covenants East Coast yachts might consider.

9. A conversion feature ( note that East Coast Yachts is not a publicly traded company).

10. A floating rate coupon.

Answer rating: 100% (QA)

1 Collateral Adding a collateral to the bond shall lower the risk involved Hence the coupon rate shall be lower The more risk the investment has more ... View the full answer