4.5 Assignment: Financing S&S Air's Expansion Plans with a Bond Issue

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When a bond is issued to the public, the corporation’s leadership must make critical decisions regarding the various features to be incorporated into the bond issue, such as collateral, seniority with other outstanding issues, a sinking fund provision, etc. The cost to companies of raising funding using bonds, the coupon rate, is ultimately determined by the risk represented by the bonds to the investor. Each bond feature affects risk in a different way. As a result, they each have a different impact on the coupon rate demanded by potential investors when a new bond is issued. In this assignment, you will explain these features and their impact in the form of a memo to senior management, including advantages/disadvantages of the various features.

Upon successful completion of the course material, you will be able to:

● Differentiate and explain the various features of a bond issue.

● Communicate with senior management the advantages and disadvantages of the various features of a bond issue.

● Distinguish among the various bond types, and their features and issues related to bond markets.

Resources

● Textbook: Fundamentals of Corporate Finance

Background Information

In this assignment, you will apply a number of the concepts regarding various features of a bond issue in the form of a memo to senior management, explaining the various features, assessing their impact on the coupon rate demanded by potential investors, and describing the advantages/disadvantages of those features in order to assist senior management in the decision-making process as a new bond issue is being developed by the corporation.

Instructions

1. Review the rubric to make sure you understand the criteria for earning your grade.

2. Using a Word document, complete the requirements of the Mini-case “Financing S & S Air’s Expansion Plans with a Bond Issue”, located at the very end of Chapter 7 in your course textbook.

3. Your response should take the form of a memo, as explained in the case.

a. For each of the ten bond features listed, briefly describe the likely impact of each of the features on the coupon rate demanded by potential bond investors when this new bond is issued. Will it cause the required coupon rate to be higher or lower?

b. In addition, for each of the ten bond features listed, briefly describe the advantages or disadvantages, from S&S Air’s perspective, of implementing that feature with the newly-issued bond.

4. When you have completed your assignment, save a copy for yourself and submit a copy to your instructor by the end of the workshop.

Access the associated rubric Access the Assignment submission page