Mark Sexton and Todd Story

1599 WordsNov 23, 20127 Pages
FIN 6130: Individual Assignment (case study) Case Study: Mark Sexton and Todd Story, the owners of a manufacturing company have decided to expand their operations. They instructed you as their newly hired financial analyst to enlist an underwriter to help sell $35 million in new 10-year bonds to finance construction. You have entered into discussion with Kim McKenzie, an underwriter from the firm of Raines and Warren about which bond features your company should consider and what coupon rate the issue will likely have. Although your Bosses are aware of the bond features, they are not sure about the costs and benefits of some features especially how they will affect the coupon rate of the bond issues. This is more so that your firm is…show more content…
A deferred callable bond may demand a slightly higher coupon rate compared to a normal bond due to its callable feature as investors are exposed to the reinvestment risk assuming that the prevailing interest rates then is lower than the coupon paid by our bond on the callable date. 6. A make-whole call provision A bond with a make whole call (provision) allowing the issuer to pay off remaining debt early by making lump sump payment based on NPV (net present value) of future interest payments that will not be paid in cause of the call. This type of call should lower the coupon rate than the normal call provision with specific dates. Bondholders will receive the market value of the bond if it is a make whole provision which then they can reinvest in another bond with same criteria. The make whole call will be defined in the indenture. Normally, an issuer doesn't expect to have to use this type of provision, but if the issuer does, investors will be compensated, or "made whole". Because the cost can often be significant, such provisions are rarely invoked. Hence, it is recommended that the bond issuance should not have a make-whole call provision. 7. Any positive covenants. Discuss any overall positive covenants that your firm may consider. The presences of positive covenants (also called as affirmative covenant) protect

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