Question

The new issue $1,000 face value bonds due in 2030 issued by Bathtub Brewing Company are seen by investors as less attractive than other bonds offered by other businesses at the same time. The coupon rate attached to these bonds will need to be __________ than other corporate bond issues in order to attract investors.

Answer 1

The Bathtub Brewing Company must issue their bonds with a coupon rate higher than other corporate bond issues to make them attractive to investors, compensating for their perceived lower attractiveness or greater risk, especially in a rising interest rate environment.

Step-by-step explanation:

The coupon rate attached to the new issue $1,000 face value bonds due in 2030 issued by Bathtub Brewing Company will need to be higher than other corporate bond issues in order to attract investors. This is because investors perceive them as less attractive compared to other bonds with similar maturities. The coupon rate must compensate for the perceived additional risk or lack of attractiveness.

For example, if the market interest rates increase, existing bonds with lower interest rates become less desirable, and their price tends to fall as investors seek new bonds with higher interest rates. Conversely, if market rates fall, the older bonds with higher rates become more valuable. The Bathtub Brewing Company may need to offer a bonus, like an increased interest payment, to make the bonds appealing in a competitive market dominated by bonds with better terms or lower risk.

When considering the risk of a bond and market changes, bonds with higher perceived risk or during times of rising market interest rates, generally sell for less than their face value to remain competitive. This discount provides a higher yield to investors to entice them to purchase these bonds over alternatives presenting better terms or lower risks.

Answer 2

The coupon rate attached to these bonds will need to be increased than other corporate bond issues in order to attract investors.

Step-by-step explanation:

Bonds are assessed to be less attractive than the other bonds are mainly because its returns does not yield as high as other bonds with the similar risk level. In other words, the higher the risk of the bond, the higher the return the bond should offered to be as attractive as their peers.

For Bathtub Brewing Company's bond, there may be some reasons such as lower coupon rate, higher risk attached to the bond or the company itself which make the bond less attractive.

Thus, coupon rate needs to be raised up so that the firm's bond may generate a higher return and as a result be as attractive as other bonds offered by other businesses.