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30 Οκτ 2013 (πριν από 3 χρόνια και 9 μήνες)

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Debt Financing

15.1 Corporate Debt

15.2 Bond Covenants

15.3 Repayment Provisions

Identify different types of debt financing
available to a firm

Understand limits within bond contracts
that protect the interests of bondholders

Describe the various options available to
firms for the early repayment of debt

Corporate dent can be private debt, which is
negotiated directly with a bank or a small
group of investors, or public debt, which
trades in a public market.

The private bank is larger than public debt

Private debt has advantage that it avoids the
cost and delay of registration with the U.S.
SEC. the disadvantage is that because it is
not publicly traded, it is illiquid, meaning
that it is hard for a holder of the firm’s
private debt to sell it in a timely manner.

Private Debt

Bank Loans

A bank loan that lasts for a specific term.

Syndicated Bank
A single loan that is funded by a
group of banks rather than just a single bank.

Revolving Line of
A credit commitment for a specific
time period, typically two to three years, which a company
can use as needed.

Backed Line of
A type of credit commitment,
where the borrower secures a line of credit by pledging an
asset as collateral.

A bond issue that does not trade
on a public market but rather is sold to a small group
of investors.

Public Debt

The Prospectus


Included in a prospectus, it is a
formal contract between a
bond issuer and a trust company, which represents the
bondholders’ interests

Original Issue Discount (OID) Bond

A coupon bond issued at a discount

Public Debt

Unsecured Corporate
A type of corporate debt that, in the
event of a bankruptcy, gives bondholders a claim to only the
assets of the firm that
are not
already pledged as collateral on
other debt.

A type of unsecured corporate debt with maturities shorter
than ten years.

Debentures :
A type of unsecured corporate debt with maturities of
ten years or longer.

Secured Corporate
A type of corporate loan or debt
security in which specific assets are pledged as a firm’s
collateral that bondholders have a direct claim to in the event of
a bankruptcy.

A type of secured corporate debt in which real
property is pledged as collateral.

A type of secured corporate debt in which
specific assets are pledged as collateral.

Public Debt

bondholder’s priority, in the event of
a default, in claiming assets not already securing
other debt

A debenture issue that has a
lower priority claim to the firm’s assets than other
outstanding debt

classes of securities that comprise
a single bond issuance

Public Debt

International Bonds

Domestic Bonds

Issued by a local entity and traded in a local market, but
purchased by foreigners

Denominated in the local currency

Foreign Bonds

Issued by a foreign company in a local market and are
intended for local investors

Denominated in the local currency

Public Debt

International Bonds

Foreign Bonds

Yankee bonds

Foreign bonds issued in the United States


International bonds that are not denominated in the local
currency of the country in which they are issued

Public Debt

International Bonds

Global Bonds

Combines the features of domestic, foreign, and Eurobonds,
and are offered for sale in several different markets

Can be offered for sale in the same currency as the country
of issuance


Restrictive clauses in a bond contract that limit
the issuer from taking actions that may undercut
its ability to repay the bonds

Advantages of Covenants

With more covenants, a firm firms can reduce its
costs of borrowing.

The reduction in the firm’s borrowing cost can more
than outweigh the cost of the loss of flexibility
associated with covenants

Call Provisions

Bond: Bonds containing a call provision
that allows the issuer to repurchases the bonds at
a predetermined price.

Date: The date in the call provision on or

which the bond issuer has the right to retire the bond.

Price: A price specified at the issuance of a bond
for which the issuer can redeem the bond.

Premium: the difference between the call price
and the par value.

Call Provisions

Call Provisions and Bond Prices

Investors will pay less for a callable bond than for an
otherwise identical noncallable bond

A firm raising capital by issuing callable bonds instead of
callable bonds will either have to pay a higher coupon
rate or accept lower proceeds

Call Provisions

Yield to Call

The yield of a callable bond calculated under the
assumption that the bond will be called on the earliest call

Yield to Worst

Quoted by bond traders as the lower of the yield to call or
yield to maturity


IBM has just issued a callable (at par) five
year, 8% coupon bond
with annual coupon payments. The bond can be called at par in
one year or anytime thereafter on a coupon payment date. It has a
price of $103 per $100 face value, implying a yield to maturity of
7.26%. What is the bond’s yield to call?



The timeline of the promised payments for this bond (if it is not
called) is:


Plan: (cont’d)

If IBM calls the bond at the first available opportunity, it will call the
bond at year 1. At that time, it will have to pay the coupon payment
for year 1 ($8 per $100 of face value) and the face value ($100). The
timeline of the payments if the bond is called at the first available
opportunity (at year 1) is:


Plan: (cont’d)

To solve the YTC, we use these cash flows, set the price equal to the
bond’s current price and solve for the discount rate.


For the YTC, setting the present value of these payments equal to
the current price gives






Solve for:


Excel Formula: =RATE(NPER, PMT, PV,FV) = RATE(1,8,


The YTM is higher than the YTC because it assumes that you will
continue receiving your coupon payments for 5 years, even though
interest rates have dropped below 8%. While under the YTC
assumptions, you are repaid the face value sooner, you are
deprived of the extra 4 years of coupon payments, so your total
return is lower.

Sinking Fund

A company makes regular payments into a fund
administered by a trustee over the life of the

These payments are then used to repurchase
bonds, usually at par.

Balloon Payment

A large payment that must be made on the
maturity date of a bond when the sinking fund
payments are not sufficient to retire the entire
bond issue.

Convertible Provisions

Bonds: Corporate bonds with a
provision that gives the bondholder a option to
convert each bond owned into a fixed number of
shares of common stock.

Conversion Ratio

Convertible Provisions

Convertible Bond Pricing

Consider a convertible bond with a $1000 face value
and a conversion ratio of 20

If you converted the bond into stock on its maturity
date, you would receive 20 shares

If you did not convert, you would receive $1000

Conversion Price

By converting the bond you essentially “paid” $1000 for 20
shares, implying a conversion price per share of $1,000/20 =

Convertible Provisions

Convertible Bond Pricing

Straight (Plain
Vanilla) Bond

A non
callable, non
convertible bond

Convertible Bonds and Stock Prices

When a firm’s stock price is much higher than the
conversion price, conversion is very likely and the
convertible bond’s price is close to the price of the
converted shares

Convertible Provisions

Combining Features

Companies have flexibility in setting the features of the
bonds they issue

Leveraged Buyout (LBO)

When a group of private investors purchases all the
equity of a public corporation and finances the
purchase primarily with debt.