Question

Explain why a company may consider issuing a bond based on the terms stated under proposal were the bond is Issued with an annual fixed coupon rate of 4% from year 1 to year 3 and a fixed annual coupon rate of 7% from year 4 to year 5

Answer 1

A company may consider issuing a bond based on these terms to incentiveize investors to purchase the bonds. As it is not a short term bond, investors may be relucant to invest in the bond if they feel that interest rates may rise in the future. Thus, by offering a higher coupon rate in years 4 and 5, the risk of investing in a lower coupon bond is reduced for investors, and gives them an incentive to invest in the bond. This is also beneficial to the company because if interest rates do increase in the future, it can pay a lower rate in the earlier years.

answered by: anonymous