A new finance manager has been appointed to the firm of Simpsons Ltd (SL), which is a public company. Board of directors approved the proposal of purchasing a new plant to the factory submitted by company CEO. CEO has instructed his newly appointed finance manager to organize to sell $ 5 million in new 12-year bonds to finance the purchase of the plant. The bonds make yearly payments. CEO instructed finance manager that he is indifferent towards receiving full amount ($ 5M.) or 95% of par value. By analysing similar risk bonds issued, Finance manager decided Yield to maturity (YTM) to be 5%. Furthermore, finance manager has to decide about which bond features SL should consider and what coupon rate the bond issue is likely to have to meet company’s financial requirements. Although finance manager is aware of the bond features, she is uncertain about the costs and benefits of some features, so she is not clear how each feature would affect the coupon rate of the bond issue.
You are finance manager’s assistant, and she has asked you to calculate the coupon rates if bonds currently sell for 95% of par value and par value respectively, and prepare a detailed report to finance manager describing the effect of each of the bond features on the coupon rate of the bond. She would also like you to describe any advantages or disadvantages of each feature.
1. Explain how a bond issuer decides on the appropriate coupon rate to set on its bonds. Explain the difference between the coupon rate and the required return (YTM) on a bond.
2. Calculate Coupon rates to set on its bonds (95% of par value and par value, respectively), and evaluate.
3. Examine bonds with different features. (You should critically examine at least 5 features highlighting their implications for bond holders and issuers drawing on the literature from agency theory.)
This assignment must be written/structured in the form of a ‘business report’. That is, it must have a/an;
(a) Executive summary (between 100 to 150 words).
(b) Introduction that; Succinctly summarizes this assignment’s topic and its key issues, controversies, etc. (no more than 200 words).
(c) Body that addresses all the requirements – see above 1-3 (no more 1500 words).
(d) Conclusion that sums up the mains issues of this assignment (no more than 200 words).
(e) Reference list containing all cited works. (f) Proper English Grammar, appearance, format, etc. At least 4 recognized journal article should be cited.
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