FIL 240 Lecture 19 Outline of Last Lecture I Definition of Leverage a Gains to leverage chart b Use of debt II Degrees of Leverage a Degree of operating leverage b Degree of financial leverage c Degree of combined leverage d DOL equation e DOF equation f DCL equation g What does this mean h How is DCL found III Definition of Capital Structure Outline of Current Lecture I Definition of a bond a Retirement of a bond b Sinking fund provision c Serial Bond d Straight bond e Callable Bond f Putable Bond g Convertible Bond h Variable rate Bond i Index Bonds j STRIP bonds k Yankee Bonds II Mortgage Bonds vs Debenture a Definition of mortgage bonds b Definition of debenture bonds III Senior vs Subordinate Bonds a Definition of senior bonds b Definition of subordinate bonds IV Indenture Agreement a Restrictive covenant These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute Current Lecture Bonds Preferred Stock and Leases I II III Bonds security that represents an obligation by the issuer to pay a certain amount of money to the purchaser lender a Paying off the principle retirement of the bond b Sinking fund provision company is required to put a certain amount of money into a secure bank account over the life of the bond i Usually required that money is in the account near the beginning of bond in case something goes wrong with the company c Serial Bond staggered maturity issue a cluster of bonds that stagger when they are paid off 10 yrs 15 yrs 25 yrs etc i Spreads out maturity premium risk and the purchaser knows they re going to get some of their money back sooner ii Inflation benefits borrowers and hurts lenders 1 20 yr bond 2 yr 10 000 000 1 02 20 1 4860 1 x 0 6730 x 10 000 000 6 729 713 how inflation hurts debt d Straight bond normal bond e Callable bonds company can call it back at the call time f Putable bond bond that the lender can put back to the borrower at a certain time g Convertible Bond company under certain conditions can convert the bond to stock h Variable rate Bond coupon set according to some accepted base rate Fed funds rate 6 etc i Index Bonds principle indexed to an agreed upon an inflation rate measure As the lender these protect you from inflation i One downside the govt issues these so the govt can understate what inflation is to raise the price j STRIP Bond Cluster of bonds using money from other bonds Making money from a high interest rate for one bond k Yankee Bonds moved gold out of the Americas and into GB Mortgage Bonds secured vs Debenture a Mortgage Bonds puts an asset on the line building equipment etc Lower coupon rate than debenture because they re less risky b Debenture doesn t have any specific backing Senior vs Subordinate a Senior classified as senior mortgage and senior debenture Senior gets their money first b Subordinate classified as subordinate mortgage and subordinate debenture i Senior Mortgage IV ii Subordinate Mortgage iii Senior Debenture iv Subordinate Debenture Indenture Agreement contract covenants how performance proceeds restrictive covenant dividends projects management location a Restrictive covenant some kind of a control on restrictive dividends Only way to control what the borrower does
View Full Document
Unlocking...