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.