Exam 2 Study Guide Exhaustive 30 questions 70 Conceptual 30 Quantitative Chapter 7 What is debt capital What are characteristics of debt Bonds Bonds are a debt instrument in which a company or government borrows money from investors and according to the conditions of the bond will repay the face value at maturity while making interest payments coupons to the bondholders at specified dates o Do not represent ownership Bondholders are lenders not owners of the company o Bond Issuers Corporations corporate bonds the US Federal Government treasury bills treasury notes treasury bonds State Local Governments municipal bonds o Bond Investors Bearer Bond Registered Bond o Bond Markets Primary market secondary market private placement o The Bond Contract Indenture the principal face amount the interest rate coupon the maturity date bond options callable convertible putable bond covenants positive negative sinking fund provisions o Priority and Collateral secured vs unsecured senior vs junior o Asset Backed Securities Collateralization o Yield o Yield to Call o Accrued Interest and the Dirty Price clean price dirty price accrued interest o Risk Factors for Bonds default risk call risk interest rate risk liquidity risk o Bond Ratings and Credit Risk Spread o Other Types of Debt syndicated loans revolving credit line swingline term loan securitized loans leases What is a syndicated loan Explain key points about revolving credit swingline and term loans Why do companies use each Syndicated Loan a company works with a group of lenders to raise money o Revolving credit line like a credit card for a company Funds can be borrowed and repaid multiple times over the term of the loan For the lowest interest rates to be effective notice of 2 days is necessary for a borrowing to be made Swingline Facility usually embedded within a revolving credit facility A small subset of the total dollar limit of the revolving facility may be borrowed and repaid on the same day as notice is given o Term Loan amortizing a loan with negotiated amounts of principal repayment over the life of the loan Why is each used credit line o Revolving facility generally for a small amount of money at a time from one large o Swingline facility for really short term borrowing o Term loan generally used for big projects or acquisition Explain the key points about securitizations and leases What unique benefits are related to each Securitized loans bank loans where some assets of the company are legally transferred to an entity that will change ownership from company to lender if a predefined trigger occurs o Require much detailed documentation o Function as a revolving credit facility o Usually short term 1 3 years with higher rates the longer the term Leasing a form of financing where the creditor legally owns the asset purchased o Potentially lower interest rates o Generally structured as amortizing loans o Legal agreement specifies end of lease asset ownership options Define the following terms characteristics of bonds indenture par value face amount coupon coupon rate security protective covenants seniority sinking fund call provision put provision debenture note Indenture the bond contract Specifies all of the terms of the borrowing relationship Par value the principal maturity value face value how much is being borrowed Face amount the total dollar amount of bonds being issued face value x number of bonds issued Coupon the interest rate specified in the bond indenture Old days lender would deliver coupon and in return receive interest payment Coupon rate the interest that the borrower will pay to the lender each period Security collateral that is or is not pledged against the debt If a security is more risky then it will have a higher required return o Secured collateralized by an asset o Unsecured not backed by any specific collateral Protective covenants financial covenants that govern the issuer and definitions of how these calculations are to be made o Positive require the issuer to take certain actions o Negative prevent the issuer from taking certain actions unless the bondholders agree Also called restrictive or prohibitive Seniority o Senior debt bondholders are first in line o Junior debt bondholders have a lower priority than another debt Also known as subordinated debt Sinking Fund bond indentures may require the firm to start depositing money into a trust account prior to maturity Reduces risk making the company less likely to default Callable bonds the company has the right to pay the borrower off prior to maturity o If the bond is called the company may be required to pay more than the face amount call premium Putable bonds grant the bondholder the right to require the issuer to repurchase the bond prior to maturity Debenture a long term 10 years or more unsecured debt instrument Note a shorter term debenture 10 years or less How frequently are corporate coupons paid What compounding period is used when valuing corporate bonds The most common are annual or semi annual coupon payments though anything is technically possible The coupon rate is always an amount per year If paid semi annually divide coupon by two to determine the amount of the payment on each payment date Compare and contrast public bonds and private placements Private placements a relatively small number of select investors usually institutions with mutual funds large banks insurance companies or pension funds purchase the companies bonds Private placements are the opposite of a public issue in which securities are made available for sale on the open market Since a private placement is offered to a few select individuals the placement does not have to be registered with the SEC How are ratings used with respect to bonds Bonds with lower ratings have greater likelihood of default known as default risk or credit risk As such investors in these bonds will require a higher return What is unique about US Treasury securities Municipal bonds Treasury securities debt securities issued by the Federal Government No default risk Municipal bonds bonds issued by state and local governments Rated similar to corporate debt One huge advantage is the interest received is exempt from taxes What are sovereign bonds What is a zero coupon bond What is a convertible bond Issued by a national government and denominated in the foreign currency Currency risk Bonds that do not pay any coupon interest whatsoever Purchased at a deep discount meaning they receive more money
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