Collateral To A Bond Case Study

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A collateral bond is backed by an asset, usually common stock, that adds security and reduces the risk of the bond to the bondholder. If the bond has collateral, the risk of the bond is less so the coupon rate will likely be lower because the bondholder is receiving extra for the added security. If the bond doesn’t have collateral, the risk is greater for the bondholder, so S&S will pay a higher coupon rate to make up for the higher risk. Adding collateral to a bond makes the bond more attractive to bondholders and would it make it easier for S&S Air to sell the bonds but it would also mean that S&S would have to invest more into the bonds they were issuing.
2)The seniority of a bond is the preference of the bond over another. If a bond has …show more content…

The buyer of the bond is giving up complete ownership of the bond to receive a higher coupon rate from S&S Air. The buyer of the bond is giving up the possible future value of the bond if bought early, so there is a higher risk and higher coupon rate associated with the bond. This provides an advantage for S&S Air, however, because the bond can be bought back at the specified price during the specified time to make a profit for the company as long as the specified time is when there is a favorable interest …show more content…

Negative covenants are another way that the bondholder can have more control over the value of their bonds and add security. Because of this, S&S Air would get to pay lower coupon payments because of the bondholder’s added control. Even though there would be cheaper coupon payments, negative covenants limit the company in its decisions. Some negative covenants S&S Air could consider might be limiting the amount of dividends it pays according to a formula, not being able to pledge any assets to other lenders, not being able to merge with other firms, not being able to sell or lease any major assets without approval by the lender. All of these covenants limit S&S Air’s power in business activities and adds safety to the bonds being held. However, S&S Air would want to consider some of these covenants because they make their bonds more attractive to potential

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