CHAPTER 7
FINANCING S&S AIR’S EXPANSION
PLANS WITH A BOND ISSUE
A rule of thumb with bond provisions is to determine who benefits by the provision. If the company
benefits, the bond will have a higher coupon rate. If the bondholders benefit, the bond will have a
lower coupon rate.
1. A bond with collateral will have a lower coupon rate. Bondholders have the claim on the collateral,
2. The more senior the bond is, the lower the coupon rate. Senior bonds get full payment in bankruptcy
3. A sinking fund will reduce the coupon rate because it is a partial guarantee to bondholders. The
4. A provision with a specific call date and prices would increase the coupon rate. The call provision
5. A deferred call would reduce the coupon rate relative to a call provision with a deferred call. The
bond will still have a higher rate relative to a plain vanilla bond. The deferred call means that the
6. A make-whole call provision should lower the coupon rate in comparison to a call provision with
specific dates since the make-whole call repays the bondholder the present value of the future cash
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7. A positive covenant would reduce the coupon rate. The presence of positive covenants protects
bondholders by forcing the company to undertake actions that benefit bondholders. Examples of
8. A negative covenant would reduce the coupon rate. The presence of negative covenants protects
bondholders from actions by the company that would harm the bondholders. Remember, the goal of
9. Even though the company is not public, a conversion feature would likely lower the coupon rate.
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