Chapter 5: Financing East Coast Yacht’s Expansion Plans with a Bond
1. If the company benefits from the provision of the bond, then the coupon rate will be higher. If the bondholder’s benefit, then the bond will have lower coupon rate.
a. Bond’s with collateral will have lower coupon rate as bondholders have claim on collateral no matter what. It provides an asset which lowers default risk. Downside to company is that this collateral cannot be sold as an asset and needs to maintain it.
b. The more senior the bond, the lower the coupon rate.
c. A sinking fund reduces coupon rate because it provides a kind of future guarantee to bondholders. The company must make payments into the sinking fund or default so it must…show more content… Coupon bond principal payment at maturity = 30,000($1,000) = $30,000,000
The principal payment for the zero coupon bonds at maturity will be:
Zero coupon bond payment at maturity = 139,827($1,000) = $139,827,000
4. Annual coupon bond payments = 30,000($1,000)(.08) = $2,400,000
Since the interest payments are tax deductible, the aftertax cash flow from the interest payments will be: