What effect do you think each of the following factors should have on the interest rate that a firm must pay on a new issue of long-term debt? Indicate whether each factor would tend to raise lower, or have an indeterminate effect on the interest rate, and then explain why.
a. The firm uses bonds rather than a term loan.
b. The firm uses debentures rather than first mortgage bonds.
c. The firm makes its bonds convertible into common stock.
d. If the firm makes its debentures subordinate to its bank debt, what will the effect be
(1) On the cost of the debentures?
(2) On the cost of the bank debt?
(3) On the average cost of total debt?
e. The firm sells income bonds rather than debentures.
f. The firm must raise $100 million, all of which will be used to construct a new plant, and it is debating the sale of first mortgage bonds or debentures. If it decides to issue $50 million of each type, as opposed to $75 million of first mortgage bonds and $25 million of debentures, how will this choice affect
(1) The cost of debentures?
(2) The cost of mortgage bonds?
(3) The overall cost of the $100 million?
g. The firm puts a call provision on its new issue of bonds.
h. The firm includes a sinking fund on its new issue of bonds.
i. The firm’s bonds are downgraded from A to BBB.