FIL 240 Lecture19Outline of Last Lecture I. Definition of Leveragea. Gains to leverage chartb. Use of debtII. Degrees of Leveragea. Degree of operating leverageb. Degree of financial leveragec. Degree of combined leveraged. DOL equatione. DOF equationf. DCL equationg. What does this mean?h. How is DCL found?III. Definition of Capital StructureOutline of Current Lecture I. Definition of a bonda. Retirement of a bondb. Sinking fund provisionc. Serial Bondd. Straight bonde. Callable Bondf. Putable Bondg. Convertible Bondh. Variable-rate Bondi. Index Bondsj. STRIP bondsk. Yankee BondsII. Mortgage Bonds vs. Debenturea. Definition of mortgage bondsb. Definition of debenture bondsIII. Senior vs. Subordinate Bondsa. Definition of senior bondsb. Definition of subordinate bondsIV. Indenture Agreementa. Restrictive covenantThese 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 LectureBonds, Preferred Stock, and LeasesI. 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 bondb. 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 debtd. Straight bond – normal bonde. 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. II. Mortgage Bonds (secured) vs. Debenturea. 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. III. Senior vs. Subordinatea. Senior - classified as senior mortgage and senior debenture. Senior gets their money first. b. Subordinate – classified as subordinate mortgage and subordinate debenture. i. Senior Mortgageii. Subordinate Mortgageiii. Senior Debentureiv. Subordinate DebentureIV. Indenture Agreement – contract, covenants (how performance proceeds), restrictive covenant, dividends, projects, management, locationa. Restrictive covenant – some kind of a control on restrictive dividends. Only way to control what the borrower
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