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Hi Mr John,
May i request please in simple words explain these 2 paragraphs
1.The bond’s covenant stipulates that should Conejo Co’s borrowing increase, the
coupon payable on these bonds will increase by 37 basis points. – here i understand that when credit rating will change we will have new coupon rate 5.2%+0.37%=5.57%but few lines below, it says
2. Furthermore, she wants to determine the coupon rate at which the new bonds would need to be issued, based on the current yield curve and appropriate yield spreads given above.
in 1rst part it says new coupon rate will be 5.57%, in second part she wants to know coupon rate. confusing.. what is difference between these 2 paragraphs ? what they want to say ?
why when we calculating new coupon rate based on the current yield curve and appropriate yield, we take it equal to $ 100 ,. new bond value for BBB rating is 107.81, why 100?
thank you
Sorry Mr John, may you please also explain what is this 120?
Additional interest payable due to higher coupon
0.37% * $120m * (1 – 0.15)Thank you
1) is referring to the existing bonds, but 2) is referring to the new bonds that they will be issuing.
If they buy back existing shares, then given that the current share price is $11 per share then the nominal value for the shares bought back will be 1,320,000 / 11 = 120,000.
Hi Mr John,
120.000 is a number of shares purchased , why we are calculating 0.37% on it, why this is considered as an additional interest payable.
we raise additional debt $1320 ., why no taking this numberthank you
That is a different 120,000!
There are existing bonds with a nominal value of $120,000 (from the SOFP given in the question) and the question says that the interest payable on the bonds will increase by 37 basis points (i.e. 0.37%). This is addition to the interest payable on the new bonds which is 3.57% x $1,320,000.
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