620 Part Seven Debt Financing
bre44380_ch24_618-651.indd 620 10/05/15 12:54 PM
The regular interest payment on a bond is a hurdle that the company must keep jumping.
If J.C. Penney ever fails to make the payment, lenders can demand their money back instead
of waiting until matters deteriorate further.^3 Thus, interest payments provide added protection
for lenders.
Sometimes bonds are sold with a lower coupon payment but at a significant discount on
their face value, so investors receive much of their return in the form of capital appreciation.^4
The ultimate is the zero-coupon bond, which pays no interest at all; in this case the entire
return consists of capital appreciation.^5
The J.C. Penney interest payment is fixed for the life of the bond, but in some issues the
payment varies with the general level of interest rates. For example, the payment may be set at
1% over the U.S. Treasury bill rate or (more commonly) over the London interbank offered
rate (LIBOR), which is the rate at which international banks borrow from one another.
Sometimes these floating-rate notes specify a minimum (or floor) interest rate, or they may
specify a maximum (or cap) on the rate.^6 You may also come across “collars,” which stipulate
both a maximum and a minimum payment.Issue date August 26, 1992
Amount issued $250 million
Maturity August 15, 2022
Denomination, face value, or principal $1,000
Interest 8.25% per annum, payable February 15 and August 15.
Offered Issued at a price of 99.489% plus accrued interest (proceeds to
company 98.614%) through First Boston Corporation.
Registered Fully registered.
Trustee Bank of America National Trust and Savings Association
Security Not secured. Company will not permit to have any lien on its property
or assets without equally and ratably securing the debt securities.
Seniority Ranks pari passu with other unsecured unsubordinated debt.
Sinking fund Annually from August 15, 2003, sufficient to redeem $12.5 million
principal amount, plus an optional sinking fund of up to $25 million.
Callable At whole or in part on or after August 15, 2002, at the option of the
Company with at least 30 days’, but not more than 60 days’, notice to
each August 14 as follows:
2003 103.870% 2004 103.485 2005 103.000
2006 102.709 2007 102.322 2008 101.955
2009 101.548 2010 101.161 2011 100.774
2012 100.387
and thereafter at 100% plus accrued interest.
Also callable for the mandatory and optional sinking funds on August
15, 2003, and thereafter.
Moody’s rating at issue date B❱ TABLE 24.1
Summary of terms
of bond issue by
J.C. Penney.(^3) There is one type of bond on which the borrower is obliged to pay interest only if it is covered by the year’s earnings. These so-called
income bonds are rare and have largely been issued as part of railroad reorganizations.
(^4) Any bond that is issued at a discount is known as an original issue discount bond. A zero-coupon bond is often called a “pure dis-
count bond.” The capital appreciation on a discount bond is not taxed as income as long as it amounts to less than .25% a year (IRS
Code Section 1272).
(^5) The ultimate of ultimates was an issue of a perpetual zero-coupon bond on behalf of a charity.
(^6) Instead of issuing a capped floating-rate loan, a company sometimes issues an uncapped loan and at the same time buys a cap from a
bank. The bank pays the interest in excess of the specified level.