S&S Air was founded 10 years ago. The company hasmanufactured and sold light airplanes over this period, and thecompany’s products have received high reviews for safety andreliability. The company has a niche market in that it sellsprimarily to individuals who own and fly their own airplanes. Thecompany has two models: The Birdie, which sells for $53,000, andthe Eagle, which sells for $78,000. S&S Air is not publiclytraded, but the company needs new funds for investmentopportunities. Mark Sexton and Todd Story, the owners of S&SAir, have decided to expand their operations. They instructed theirnewly hired financial analyst, Chris Guthrie, to enlist anunderwriter to help sell $20 million in new 10-year bonds tofinance construction. Chris has entered into discussions withRenata Harper, an underwriter from the firm of Crowe & Mallard,about which bond features S&S Air should consider and whatcoupon rate the issue will likely have. Although Chris is aware ofthe bond features, he is uncertain as to the costs and benefits ofsome features, so he isn't clear on how each feature would affectthe coupon rate of the bond issue. You are Renata's assistant, andshe has asked you to prepare a memo to Chris describing the effectof each of the following bond features on the coupon rate of thebond. She would also like you to list any advantages ordisadvantages of each feature.
a. The security of the bond—that is, whether the bond hascollateral.
b. The seniority of the bond.
c. The presence of a sinking fund.
d. A call provision with specified call dates and callprices.
e. A deferred call accompanying the preceding callprovision.
f. A floating rate coupon.
