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Coupon Bearing Bonds vs. Zero Coupon Bonds

Dan is considering whether to issue coupon bearing bonds or zero coupon bonds. The YTM on either bond issue will be 7.5%. The coupon bond would have a 6.5% percent coupon rate. The company's tax rate is 35%. These are 20 year bonds.

2. How many of the coupon bonds must East Coast issue to raise the $50 million?

3. In 20 years, what will be the principal repayment due if East Coast Yachts issues the coupon bonds? What if it issues the zeroes?

4. What are the company's considerations in issuing a coupon bond compared to a zero coupon bond?

5. Suppose East Coast Yachts 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%, what is the call price of the bond? What if it is 8.2%?

6. 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?

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Solution Summary

Coupon bearing bonds versus the zero coupon bonds are examined. Whether the principal repayment is due is determined.