The CEO of ECY Company, Inc., has decided to expand the companys operations. She has asked the CFO

to enlist an underwriter to help sell $50 million in new 20-year bonds to finance new construction. The

CFO has entered discussions with an underwriter from an investment bank about which bond features

ECY should consider and also what coupon rate the issue will likely have. Although the CFO is aware of

bond features, he is uncertain as to the costs and benefits of some of them, so he isnt clear on how

each feature would affect the coupon rate of the bond issue.

Note:

Use $1,000 for par value and a coupon rate of 7.5% for your assignment calculations. We can assume that the coupon bonds will have a coupon rate equal to the YTM, they will sell at par.

Q1. You are asked you to prepare a memo to the describing the effect of each of the following bond

features on the coupon rate of the bond. She would also like you to list any advantages or

disadvantages of each feature.

1. The security of the bond, that is, whether or not the bond has collateral. (2 pts)

2. The seniority of the bond. (2 pts)

3. The presence of a sinking fund. (2 pts)

4. A call provision with specified call dates and call prices. (2 pts)

5. A deferred call accompanying the above call provision. (2 pts)

6. A make-whole call provision. (2 pts)

7. Any positive covenants. Also, discuss several possible positive covenants ECY might consider. (2 pts)

8. Any negative covenants. Also, discuss several possible negative covenants ECY might consider. (2 pts)

9. A conversion feature (note that ECY is not a publicly traded company). (2 pts)

10. A floating rate coupon. (2 pts)

Q2. How many of the coupon bonds must ECY issue to raise the $50 million? How many of the zeroes must it issue? (20 pts)

Q3. In 20 years, what will be the principal repayment due if ECY issues the coupon bonds? What if it issues the zeroes? (10 pts)

Q4. What are the companys considerations in issuing a coupon bond compared to a zero-coupon bond? (20 pts)

Q5. Suppose ECY issues the coupon bonds with a make-whole call provision. The make-whole call rate is the Treasury rate plus .40 percent. If East Coast calls the bonds in seven years when the Treasury rate is 4.8 percent, what is the call price of the bond? What if it is 8.2 percent? (10 pts)

Q6. Are investors really made whole with a make-whole call provision? (10 pts)

Q7. After considering all the relevant factors, would you recommend a zero-coupon issue or a regular coupon issue? Why? Would you recommend an ordinary call feature or a make- whole call feature? Why? (10 pts)