Chapter 6 Case 1.

For a collateral trust bond, it is secured by financial securities and often involve a pledge of common stock held by the corporation. The coupon rate of the bond will be lower as it is secured. The advantage of this feature is that the risk of the bondholder is low. It provides security of the bondholders loan as the corporation may even sell assets to pay the debt. 2. For the seniority of the bond, it indicates preference in position over other lenders. Senior bondholders enjoy a lower coupon rate. It is because in the event of default, they will get paid first before the junior bondholders. The disadvantage for the subordinated lenders is they will only be paid off after the specified creditors have been compensated. 3. For the presence of a sinking fund, the bond will have a lower coupon rate as it is a secured bond. Sinking fund provision is an account managed by the bond trustee for early bond redemption. The company makes annual payments to the trustee, who then uses the fund to retire a portion of the debt. This reduces the risk of the bondholder of losing the pay back money and so will have a lower coupon rate. It also ensures the last payment will not be too large. 4. The call provision is an agreement giving the corporation the option to repurchase the bond at a specific price prior to maturity. Corporate bonds are usually callable and that the coupon rate will be higher. It allows the company to repurchase the issued bonds and the risk of the bondholders will be higher. For the corporate, they can refinance the bond if interest rate drops and thus gain an advantage. 5. For a deferred call provision, company is prohibited from calling its bonds in the bonds early years. As the bond is call- protected, the coupon rate will be lower as the bondholders are guaranteed of receiving coupon payments. The advantage of this feature is that the coupon payment to bondholders is secured during the period of prohibition. 6. For the make- whole call provision, bondholders receive exactly what the bonds are worth if they are called. With this feature, they will not suffer any loss and so the coupon rate of the bond will be low. The bondholders will be compensated from the interest payments that are missed because of early redemption. 7. For the positive covenants, it specifies an action that the company agrees to take or a condition the company must abide by and so the coupon rate of the bond will be low. It protects the bondholders by forcing the company to benefit them. S&S Air might consider to maintain its working capital at or above some specified minimum level, periodically furnish audited financial statements to the lender or maintain any collateral or security in good condition. 8. For the negative covenants, it limits or prohibits actions that the company might take. It protects the bondholders by limiting the company to do

something that may harm their benefits and so the coupon rate of the bond will be low. S&S Air might consider to limit the amount of dividends it pays according to some formula, cannot merge with another firm, cannot pledge any assets to other lenders or cannot issue additional long-term debt. 9. For a conversion feature, the coupon rate of the bond will be lower as the convertible bond can be swapped for a fixed number of shares of stock any time before maturity at the holders option. The holder of the convertible bond is compensated with the right to convert the bond into stock of the issuing company. The disadvantage is financing with convertible bonds runs the risk of diluting not only the EPS of the company's common stock, but also the control of the company. 10. For a floating rate coupon, the coupon payments are adjustable. Floating rate bonds has less price risk as the coupon floats, it is less likely to differ substantially from the yield- to- maturity. Also, the bondholder has the right to redeem the note at par on the coupon payment date after some specified amount of time. With this called put provision the coupon rate will be lower as it benefits the bondholders. The disadvantage is that because of the fluctuation of the coupon rate, both issuer and holders are taking risk on their bond.