Concept explainers
Case summary:
Person M and Person T are the owners of Company S. They have planned to expand their business. Hence, they asked Person C, the financial analyst to identify an underwriter who would help the company to raise $35,000,000 through a 10-year bond issue. Person C decided that Company R would be the underwriter of the issue. Person C met Person R from Company R and discussed about the bond issue and the features of the bond.
Although Person C was aware of the bond features, he or she was not aware of the effect of those features on the coupon rate and the cost and benefits of those features. Hence, Person R asked his or her assistant, Person X to prepare a memo regarding the effect of bond features on the coupon rate and the cost and benefits of those features.
Characters in the case:
- Company S: The firm issuing bonds
- Person M: Co-owner of Company S
- Person T: Co-owner of Company S
- Person C: Financial analyst of Company S
- Company R: The underwriter
- Person R: The employee of Company R
- Person X: Person R’s assistant
To determine: The effect of positive covenants on the coupon rate, and its advantages and disadvantages
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