The CEO of UNK Company, Inc., has decided to expand the companys operations. She has asked the CFO to enlist an underwriter to help sell $40 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 UNK 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.

1. How many of the coupon bonds must UNK issue to raise the $50 million? How many of the zeroes must it issue?

2. In 20 years, what will be the principal repayment due if UNK issues the coupon bonds? What if it issues the zeroes?

3. What are the companys considerations in issuing a coupon bond compared to a zero-coupon bond?

4. Suppose UNK issues the coupon bonds with a make-whole call provision. The make-whole call rate is the Treasury rate plus .40 percent. If UNK 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?