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Chapter 5: 2DQ (page 524)

What are some specific features of bond agreements? (LO16-1)

Short Answer

Expert verified

Par value, coupon rate, and maturity date are some specific features of bond agreements.

Step by step solution

01

Bond agreements

A corporate bond indicates the long-term debt instrument, and a bond agreement represents the necessary information associated with the same.

02

Features of bond agreements

The bond agreements contain the following features:

  • Par value: The par represents the initial value of a bond and is also known as principal orface value.
  • Coupon rate: The coupon rate represents the actual interest rate on the bonds to be paid by the corporation.
  • Maturity date: The date represents the final date on which the bond’s principal amount will be repaid.

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Most popular questions from this chapter

Question: The Bowman Corporation has a \(18 million bond obligation outstanding, which it is considering refunding. Though the bonds were initially issued at 10 percent, the interest rates on similar issues have declined to 8.5 percent. The bonds were originally issued for 20 years and have 10 years remaining. The new issue would be for 10 years. There is a 9 percent call premium on the old issue. The underwriting cost on the new \)18,000,000 issue is \(530,000, and the underwriting cost on the old issue was \)380,000. The company is in a 35 percent tax bracket, and it will use an 8 percent discount rate (rounded after-tax cost of debt) to analyze the refunding decision.

c. Calculate the net present value.

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Tyson Iron Works is about to go public. It currently has after-tax earnings of \(4,400,000, and 4,200,000 shares are owned by the present stockholders. The new public issue will represent 500,000 new shares. The new shares will be priced to the public at \)25 per share with a 3 percent spread on the offering price. There will also be $280,000 in out-of-pocket costs to the corporation.

e. Determine what rate of return must be earned on the proceeds to the corporation so there will be a 10 percent increase in earnings per share during the year of going public.

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