Assignment: Interest Rates and Bond Valuation CaseWorksheet

Read the closing case Financing East Coast Yachts Expansion Plans with a Bond Issue in chapter 5 of your textbook and answer the four questions posed on this sheet.

• 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 semiannually. The companys tax rate is 35%.

2. How many of the coupon bonds must East Coast Yachts issue to raise the $40,000,000? How many of the zeroes must it issue?

3. In 20 years what will be the principal repayment due if East Coast Yachts issues the coupon bonds? If it issues the zeroes?

4. After considering all the relevant factors, what would you recommend the firm do?