Is one approach fairer to all the investors in aggregate

Reference no: EM13301324

You will invest (not investing is not a choice) in one of two bonds that are identical except for the details of their sinking funds. The sinking fund for Bond A calls for periodic redemption of bonds, with the bonds to be redeemed chosen by a random lottery. The sinking fund for Bond B requires that the company deposit with a very sound financial institution, which will act as the Trustee, funds that will be invested in US Treasuries that will mature at the same time as does Bond B. The total of the company's payments to the sinking fund and the interest earned on the Treasuries will be sufficient to redeem all of the bonds in the Bond B issue at maturity.

(A) From your perspective as an investor, what are the pros and cons of each approach if both bonds are rated BBB by S&P and Fitch and Baa2 by Moody's? Be sure to explain the reasons you classified things as pros and cons.

(B) Is one approach "fairer" to all the investors in aggregate? Discuss your reasons and logic that led you to your conclusions.

Reference no: EM13301324

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