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.
***Bond is extendable at the discretion of the bondholder for an addional 10 years
Ignoring credit quality, identify four features of these issues that might account for the lower coupon on the ABC debt. Explain.