Kimric Coupon Case
| Raines and Warren |
Memo
To: Chris Guthrie
From: Vicki Cowan, Assistant to Kim McKenzie
CC: Kim McKenzie
Date: 7/3/2011
Re: Bond Features: Effects and Benefits to Coupon Rate
Answers to questions regarding bond features and how they will positively and negatively affect the coupon rate per Kim McKenzie.
1. The security of the bond: whether the bond has collateral.
The more secure the bond is to the investor, the lower the interest rate or bond coupon. Therefore, with collateral backing the bond, the coupon will be lower. The disadvantage of using company collateral to back the bonds is, the asset used as collateral cannot be sold during the term of the bond and must maintain its value.
2. Seniority of the bond.
The seniority …show more content…
The presence of a sinking fund.
A sinking fund is an account set up by the trustee of the bonds. The trustee saves and pools money to purchase, pay off, or call bonds early. Setting up a sinking fund will lower the risk, thus lowering the coupon rate. The risk to the company is not having available funds to feed the trust.
4. A call provision with specified call dates and call prices.
A call provision could be included to call the bonds if interest rates drop substantially. The call provision will raises the coupon rate but protect you from paying a high rate for a long period in the event rates drop.
5. A deferred call accompanying the call provision.
A deferred call accompanying the call provision would give the bond purchaser a protection period where the bond could not be called. Adding this provision will prohibit you from calling the bond for a set time (call period), and puts you at risk of paying a high interest rate for the deferred period. Therefore, you have a lower coupon rate than a call provision with no deferral period but still higher than a bond with no call provision at all.
6. A make-whole call …show more content…
The discount rate is based on the current Treasury rate plus a small-specified percentage. The investor is protected by being made whole if there is a call.
7. Any positive covenants for purchaser and some S&S might consider. Positive covenants on bonds are proactive and reduce the coupon rate. Applying positive covenants to the bond makes it more attractive and secure to the investor by applying conditions that protect the investor’s interest. You may wish to consider a covenant to furnish your audited financial statements to the investors. This is something you already do and it would decrease the coupon rate. If you choose to secure with assets (see number 1), including a covenant to assure that the asset is in good working condition would lower the coupon rate.
8. Any negative covenants for purchaser and some S&S might consider.
Negative covenants on bonds are restrictive and reduce the coupon rate. Applying negative covenants to the bond makes it more attractive to the investor but may hinder the operation by putting limitations on your business actions. You may want to consider a clause that you will not merge with another firm and that you will not issue any additional long-term debt.
9. A conversion
Memo
To: Chris Guthrie
From: Vicki Cowan, Assistant to Kim McKenzie
CC: Kim McKenzie
Date: 7/3/2011
Re: Bond Features: Effects and Benefits to Coupon Rate
Answers to questions regarding bond features and how they will positively and negatively affect the coupon rate per Kim McKenzie.
1. The security of the bond: whether the bond has collateral.
The more secure the bond is to the investor, the lower the interest rate or bond coupon. Therefore, with collateral backing the bond, the coupon will be lower. The disadvantage of using company collateral to back the bonds is, the asset used as collateral cannot be sold during the term of the bond and must maintain its value.
2. Seniority of the bond.
The seniority …show more content…
The presence of a sinking fund.
A sinking fund is an account set up by the trustee of the bonds. The trustee saves and pools money to purchase, pay off, or call bonds early. Setting up a sinking fund will lower the risk, thus lowering the coupon rate. The risk to the company is not having available funds to feed the trust.
4. A call provision with specified call dates and call prices.
A call provision could be included to call the bonds if interest rates drop substantially. The call provision will raises the coupon rate but protect you from paying a high rate for a long period in the event rates drop.
5. A deferred call accompanying the call provision.
A deferred call accompanying the call provision would give the bond purchaser a protection period where the bond could not be called. Adding this provision will prohibit you from calling the bond for a set time (call period), and puts you at risk of paying a high interest rate for the deferred period. Therefore, you have a lower coupon rate than a call provision with no deferral period but still higher than a bond with no call provision at all.
6. A make-whole call …show more content…
The discount rate is based on the current Treasury rate plus a small-specified percentage. The investor is protected by being made whole if there is a call.
7. Any positive covenants for purchaser and some S&S might consider. Positive covenants on bonds are proactive and reduce the coupon rate. Applying positive covenants to the bond makes it more attractive and secure to the investor by applying conditions that protect the investor’s interest. You may wish to consider a covenant to furnish your audited financial statements to the investors. This is something you already do and it would decrease the coupon rate. If you choose to secure with assets (see number 1), including a covenant to assure that the asset is in good working condition would lower the coupon rate.
8. Any negative covenants for purchaser and some S&S might consider.
Negative covenants on bonds are restrictive and reduce the coupon rate. Applying negative covenants to the bond makes it more attractive to the investor but may hinder the operation by putting limitations on your business actions. You may want to consider a clause that you will not merge with another firm and that you will not issue any additional long-term debt.
9. A conversion