Q5-1

Barret Connelly and Danny Ferris, the owners of LynnU Inc. have decided to expand their operations. They have instructed their newly hired financial analyst, Brett Clulow to enlist an underwriter to help sell $100 million in new 10-year bonds to finance the new construction. Brett has entered into discussion with Michelle Tolsma, an underwriter from the firm Fighting Knights, about which bond features LynnU Inc. should consider and what coupon rate the issue will likely have.

Although Brett is aware of the bond features, he is uncertain as to the costs and benefits of some features, so he isnt clear on how each feature would affect the coupon rate of the bond issue. You are Michelles assistant, and she has asked you to prepare a memo to Brett describing the effect of each of the following bond features on the coupon rate of the bond. She also would like you to list any advantages or disadvantages of each feature.

Please address the following in Memo format:

1. The security of the bond: whether the bond has collateral.
2. The seniority of the bond.
3. The presence of a sinking fund.
4. A call provision with specified call dates and call prices.
5. A deferred call accompanying the preceding call provision.
6. A make-whole call provision.
7. Any positive covenants: discuss several possible positive covenants LynnU Inc. might consider.
8. Any negative covenants: discuss several possible negative covenants LynnU Inc. might consider.
9. A conversion feature (note that LynnU Inc. is NOT a publicly traded company).
10. A floating-rate coupon.