Assume that two firms issue bonds with the following characteristics. Both bonds are issued at par.

 

ABC Bonds

XYZ Bonds

Issue size

$1.2 billion

$150 million

Maturity

10 years*

20 years

Coupon

9%

10%

Collateral

First mortgage

General debenture

Callable

Not callable

In 10 years

Call price

None

110

Sinking fund

None

Starting in 5 years

Ignoring credit quality, identify four features of these issues that might account for the lower coupon on the ABC debt. Explain.