After Dan\'s EFN (External Finance Needed) analysis for East Coast Yachts, Laris
ID: 2813357 • Letter: A
Question
After Dan's EFN (External Finance Needed) analysis for East Coast Yachts, Larissa (the founder of East Coast Yachts) has decided to expand the company's operations. She has asked Dan to enlist an underwriter to help sell $70 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 Part 1-Q1: You are Kim's assistant, and she has asked you to prepare a memo to Dan describing the effect of each of the bond features on the coupon rate of the bond d. Complete the following tasks for each bond 1. 2. Describe characteristics of the bond Determine whether the bond with feature benefits the issuers or investors. In addition, explain why you think so Effect of the feature on coupon rates "A rule of thumb with bond provisions is to determine who the provisions benefit. If the company benefits, the bond will have a higher coupon rate. If the bondholders benefit, the bond will have a lower coupon rate. " Provide the reference information 3. 4. P1-01: Fill the boxes Bonds Bond issuers Bondholders Description Whom does this feature benefit?And, Effect on coupon rates (f textbook, provide the page number. If Features Type of bonds do you think so other sources, provide information Secured bond Unsecured bond : Senior bond Collateral Seniority Junior or Subordinated bond Callable bond Non-callable bond Puttable bond Bond with positive covenants Bond with negative covenants Call provision CovenantsExplanation / Answer
Effect on
coupon rates
Secured bonds
Unsecured bonds
Pledged by issuer with an asset such as property or equipment. In case of default, title of asset passes to bondholders
Not secured by any asset. More risky than secured bond
Bond holders
Bond issuers
Low
High
Senior bond
Junior bond
Senior bond comes in the category of tier 1 debt. It must be repaid first in event of bankruptcy or liauidation
Junior debt is second in priority and paid after senior debt.
Bondholders
Bond issuers
Low
High
Callable
Non callable
Puttable bond
Callable bonds can be redeemed before its maturity particulary in the state of declining interest rate. It is refinanced at a lower interest rate.
Non callable bonds can't be redeemed prior to its maturity.
Holder of a puttable bond has the right to force the issuer to repurchase the bond at a date desired by the holder
Bond issuers
Bond holders
Bond holders
High
Low
Low
Bond with positive covenants
Bond with negative covenants
Positive covenants requires the issuer to meet some specific requirements
Negative covenants forbid issuers from exercising too much control and act as per choice.
Covenants are designed to look after the interest of both issuers and holders and are enforeceable till maturity of the bond
Issuers
Holders
High
Low
Features Types of bonds Description BeneficiaryEffect on
coupon rates
CollateralSecured bonds
Unsecured bonds
Pledged by issuer with an asset such as property or equipment. In case of default, title of asset passes to bondholders
Not secured by any asset. More risky than secured bond
Bond holders
Bond issuers
Low
High
SenioritySenior bond
Junior bond
Senior bond comes in the category of tier 1 debt. It must be repaid first in event of bankruptcy or liauidation
Junior debt is second in priority and paid after senior debt.
Bondholders
Bond issuers
Low
High
Call provisionCallable
Non callable
Puttable bond
Callable bonds can be redeemed before its maturity particulary in the state of declining interest rate. It is refinanced at a lower interest rate.
Non callable bonds can't be redeemed prior to its maturity.
Holder of a puttable bond has the right to force the issuer to repurchase the bond at a date desired by the holder
Bond issuers
Bond holders
Bond holders
High
Low
Low
CovenantsBond with positive covenants
Bond with negative covenants
Positive covenants requires the issuer to meet some specific requirements
Negative covenants forbid issuers from exercising too much control and act as per choice.
Covenants are designed to look after the interest of both issuers and holders and are enforeceable till maturity of the bond
Issuers
Holders
High
Low
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.