East Coast Yacht case

Unit 4 Assignment Your Name Subject and Section Professor’s Name January 25, 2024 1 Bond Features and Their Effects on Coupon Rate 1 Security of the Bond (Collateral) 1 Effect on Coupon Rate: One of the notable effects is that the secured bonds typically have a lower coupon rate because the collateral reduces the risk to the bondholder. 2 Advantages: On the one hand, it lowers the cost of borrowing, may be easier to sell. 3 Disadvantages: on the other hand, the company assets are tied up as collateral and cannot be used for other purposes. 2 Seniority of the Bond 4 Effect on Coupon Rate: As compared to other bongs, senior bonds usually have a lower coupon rate compared to subordinate bonds due to lower risk. 5 Advantages: Attracts investors looking for less risky bonds. 6 Disadvantages: Limits flexibility in future borrowing, as senior bondholders have priority claims. 3 Presence of a Sinking Fund 7 Effect on Coupon Rate: One of the effects of the presence of a sinking funds is that it lower the coupon rate because it provides additional security for the bondholders. 8 Advantages: On the one hand, it reduces risk of default at maturity by gradually retiring debt. 9 Disadvantages: In contrast, one disadvantage is that it requires the company to set aside funds that cannot be used for other opportunities. 4 Call Provision 10 Effect on Coupon Rate: As according to Fabozzi and Fabozzi (2021), one of the effects of a call provision is that it typically increases the coupon rate because the bondholder is at risk of the bond being called before maturity. Advantages: Flexibility for the company to refinance if rates fall. Disadvantages: However, this also lead to higher cost of borrowing. 5 Deferred Call Effect on Coupon Rate: May reduce the coupon rate compared to a bond that can be called immediately. Advantages: Gives investors a guaranteed period where the bond cannot be called. Disadvantages: Company must wait longer to refinance if beneficial. 6 Make-whole Call Provision Effect on Coupon Rate: A make-whole call provision, does not only lower the coupon rate, but also provides bondholders with fair compensation if the bond is called. Advantages: May be more attractive to investors, allowing for a lower coupon rate. Disadvantages: Potentially high cost to the company if the bond is called. 7 Positive Covenants Effect on Coupon Rate: One notable effect of this, is that it can lower the coupon rate by assuring bondholders that the company will maintain certain financial health standards. Advantages: May allow for more flexibility than negative covenants. Disadvantages: May limit operational flexibility. Possible Covenants: Maintenance of certai...