Mark Hughes and Todd Hesse, the owners of H&H Associates, have decided to expand their operations. They instructed their newly hired financial analyst, Christine Toth, to enlist an underwriter to help sell $20 million in new 10 year bonds to finance construction. Christine has entered into discussions with Phil Granite, an underwriter from the firm Lewis, Brisbee and Granite, about which bond features H&H Associates should consider and what coupon rate the issue will likely have.

Although Christine is aware of the bond features, she is uncertain as to the costs and benefits of some features, so she is not clear on how each feature would affect the coupon rate of the bond issue. You are Phil's assistant and he has asked you to create a memo to Christine describing the effect of each of the following bond features on the coupon rate of the bond. He would also like you to list any advantages or disadvantages of each feature.

Questions

1. The security of the bond - that is, whether the bond has collateral.
2. The seniority of the bond.
3. The presence of a sinking fund.
4. A floating rate coupon.