Bream Wine Ltd (BWL) is in the business of bottling wine, particularly for small wineries that cannot afford sophisticated technical equipment and want to concentrate on growing grapes themselves. One of the key features of the bottles that are used by Bream Wine Ltd is that, for the bottles used for white wine and champagne, they have an in-built insulation device that is successful in keeping the contents of the bottle cold. At the same time the temperature is not affected by the bottle being held in the hand.

In January 2020, Solar-Blue, a company experimenting with energy sources that can help mitigate climate change, produced a device which, when attached to the outside of a container, could display the actual temperature of the liquid inside. The temperature was displayed by the highlighting of certain colours on the device. Exactly how this device could be attached to wine bottles had yet to be specifically determined. However, Bream Wine Ltd believed that its employees had the skills that would enable the company to determine the feasibility of such a project. Nonetheless the cost of attaching the device to wine bottles would be significant because BWL has to setup a new plant at a cost of $14 million.

The board of directors of BWL has decided to give this project the go-ahead and the board instructed newly hired financial analyst, Max Wilson to organize selling $ 14 million in new 10-year bonds to finance the project. The bonds make yearly payments. BWL decided to issue discounted bonds because the companys debt rating was BBB. The chairman of the board instructed Max that he is indifferent towards receiving the full amount ($ 14M.) or 90% of par value. By analysing similar risk bonds issued, Max decided the Yield to maturity (YTM) would be 5%. Furthermore, Max has to decide about which bond features BWL should consider and what coupon rate the bond issue is likely to have, in order to meet the companys financial requirements.

Max is uncertain about the costs and benefits of bond features. In particular, he is not sure how each feature would affect the coupon rate of the bond issue.

Required You are Maxs assistant and he has asked you to: firstly, calculate the coupon rates if bonds currently sell for 90% of par value and par value respectively; and secondly, prepare a detailed report to Max describing the effect of each of the bond features on the bonds coupon rate. Furthermore, he would also like you to describe any advantages or disadvantages of each feature.

In your report: Explain what the BBB debt rating is. Explain how a bond issuer decide on the appropriate coupon rate to set on its bonds. Explain the difference between the coupon rate and the required return (YTM) on a bond. Calculate coupon rates to set on its bonds (90% of par value and par value respectively), and evaluate them. Examine and evaluate bonds with different features (You should critically examine at least 5 features highlighting their implications for bond holders and issuers)