Caroline decided to expand her frozen food business, Zizan Inc., a private company in Texas. She seeks help from an underwriter that can assist her to issue 20-year new bonds with a total amount of USD 50 million. Jason Bourn who works with Merrill Lynch (an underwriter) agreed to help Caroline on this matter. He discuss with Caroline on the possible feature of the bond and coupon rate for Zizan Inc. Caroline, however is deliberating on the costs and benefit of some of the bond features as she is uncertain on how each of bond feature can influence the coupon rate.

At the same time Caroline is also contemplating on whether the company should issue coupon bearing bonds or zero-coupon bonds. Note that theyield to maturity for both bonds are 7.5%. Coupon rate is at 6.5%, whilst the corporate tax rate is 35%.

1)If the company decides to issue zero coupon bonds, how much should Zizan Inc. issue?

2)If the company decides to issue coupon-bearing bonds, how many should Zizan Inc issue?

3)After the bond matures in 20 years, what is the principal that the company should pay to the bondholders if they issue (a) zero-coupon bond, and (b)coupon-bearing bond

4)List all the consideration that the company should had in issuing a coupon-bearing bond in comparison to zero coupon bond

5)Assume that Zizan Inc issues the coupon-bearing bonds with make-whole call provision that have a call rate of Treasury rate plus 0.4%. What is the call price of the bond if Zizan Inc decided to call the bonds after seven years, which the current Treasury rate is 4.8%? What happen if the rate is 8.2%?

6)Will you recommend the company to issue zero-coupon bonds or coupon-bearing bonds? is ordinary call feature or a make-whole call feature better for Zizan Inc? Justify your answer