bond pricing

Topics: Interest, Loan, Debt Pages: 20 (2991 words) Published: October 25, 2014
3215
REV: JUNE 21, 2010

WILLIAM J. BRUNS

Lyons Document Storage Corporation:
Bond Accounting
In December 2008 Rene Cook sat in her cubicle trying to remember what she had learned in business school about bonds and bond accounting. Ms. Cook, a new MBA and special assistant in a training assignment with the company president, had just met with David Lyons, president of Lyons Document Storage Corporation. He had asked her to think about the possible consequences of repurchasing company bonds outstanding using cash that he felt could be obtained by issuing new bonds with a lower interest rate. Mr. Lyons had asked Rene to focus on how much the company's annual interest payments could be reduced, how reported earnings would be affected, and how the refunding would change the company's financial position as referenced on the balance sheet, if at all.

The Company
The Lyons Company was a family business in the stationary supply business until the document storage opportunity appeared in the early 1990s. Lyons Document Storage Corporation was incorporated in 1993 to compete in the emerging and rapidly growing industry that provides secure, off-site storage of documents for other corporate customers. The demand for storage was fueled by the need for corporations to retain records of sales contracts, employment records, compliance records, and other documents. The convenience of secure storage and easy recovery in professionally managed warehouses appealed to corporate clients that wanted to save space in their more expensive office buildings. At the same time, the stationary supply business was growing more competitive with the entrance of Staples, Office Depot, and Office Max.

The 1990s were difficult for Lyons because there were still differences among management about directions and the company's future. A large competitor, Iron Mountain, was expanding rapidly in the United States and internationally. When the decision to focus on document storage was made, it was imperative to move quickly to secure storage space and transportation equipment. Management decided to fund the company's growth by issuing debt rather than by issuing additional equity. Lyons had operated conservatively without any long-term debt until it issued bonds in 1999. The bonds issued were $10 million in 20-year bonds, offering a coupon rate of 8% with interest paid semiannually, and sold to yield the 9% market rate of interest at the time. ________________________________________________________________________________________________________________ Professor William J. Bruns prepared this case solely as a basis for class discussion and not as an endorsement, a source of primary data, or an illustration of effective or ineffective management.

This case, though based on real events, is fictionalized, and any resemblance to actual persons or entities is coincidental. There are occasional references to actual companies in the narration.
Copyright © 2009 Harvard Business School Publishing. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business Publishing. Harvard Business Publishing is an affiliate of Harvard Business School.

3215 | Lyons Document Storage Corporation: Bond Accounting

Current Situation
David Lyons had told Rene Cook that he felt the time might be ripe to refund the 1999 bond issue and replace it with bonds bearing lower interest rates. He had talked with the company’s investment bankers who had told him that $10 million in new 6% bonds with semiannual interest payments could be issued to provide the company with exactly $10 million, not considering underwriting...
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