Explanation:
A number of high-yield bonds have coupon structures that allow the firm to conserve cash in early years, such as deferred-interest bonds, step-up bonds, and payment-in-kind bonds. A reset bond is another type of coupon structure utilized by some high-yield bond issues where designated investment banks periodically reset the coupon to reflect market rates and the creditworthiness of the issue. Issuing a reset bond would not tend to allow the firm to conserve cash now, but it could allow the firm to conserve cash later if the creditworthiness of the firm improves or if rates decline.
(Book 3, Module 43.2, LO 43.c)
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Question 31
Wierwille Systems is a start-up firm with a new technology it is seeking to bring to the marketplace. Because the technology is unproven, Wierwille is considered a high-risk firm and carries a B-credit rating. The corporate treasurer expects interest rates to fall in the future, but given the company's start-up status he believes it is in the firm's best interest to issue high-yield bonds with a coupon structure that will allow the firm to save on interest costs now while the firm is trying to get off the ground, even though it may cost them in the form of higher interest payments down the road. Given the situation, which of the following coupon structures is least likely to meet the treasurer of Wierwille Systems' goal?
A
Reset bonds.
B
Step-up bonds.
C
Payment-in-kind (PIK) bonds.
D
Deferred-interest bonds (DIB).
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