2.2.1.2. Long-Term Debt and Liabilities

Question 1

Definition | Private Debt

Answer 1

debt that is not publicly traded, often a bank loan (also: not rtraded on stock exchange)

Question 2

Definition | Term Loan (private debt)

Answer 2

loan that lasts for a specific term

Question 3

Definition | Syndicated Bank Loan (private debt)

1.
2.

Answer 3

• single loan that is funded by a group of banks rather than just a single bank
• usually, one of the member of the syndicate (the lead bank) negotiates the terms of the bank loan

Question 4

Definition | Revolving Line Of Credit (private debt)

Answer 4

credit commitment for a specific time period up to some limit, which a company can use as needed

Question 5

Definition | Private Placement (private debt)

1.
2.

Answer 5

• a bond issue that does not trade on a public market but rather is sold to a small group of investors
• does not need to be registered, therefore is less costly to issue

Question 6

Description | Unsecured Bonds vs Secured Bonds

Answer 6

U: in the event of a bankruptcy bondholders have a clsim to only the assets of the firm that are not already pledged as collateral on other debt

S: in the event of a bankruptcy bondholders have a claim to the assets pledged as collateral to that specific bond

Question 7

Types of Unsecured Bonds

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2.

Answer 7

• notes | typically, notes have maturities less han 10 years
• debentures | longer maturities

Question 8

Types of Secured Bonds

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2.

Answer 8

• mortgage bonds | secured by real property
• asser-backed bonds | secured by any kind of asset

Question 9

What is a subordinated debenture?

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2.
3.

Answer 9

• if more than one debenture outstanding, the bondholders prioritxy in claiming assets in the vent of default is important
• most debenture issues contain clauses restricting the companyx from issuing new debt with equal or higher priority than existing debt
• when a firm conducts a subsequent debenture issue that has lower priority than its outstanding debt, the new debt is known as SD

Question 10

Definition | Covenants

Answer 10

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

Question 11

What are the types of private debt?

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2.
3.
4.

Answer 11

• term loan
• syndicated bank loan
• revolving line of credit
• private placement

Question 12

Bond Covenants | Definition

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2.
3.

Answer 12

• bond agreements containing covenants that restrict the ability of management to pay dividends
• other covenants ,ay restrict the level of further indebtness and specify that the issuer must maintain a minimum amount of working capital
• the the issuer fails to live up to any covenant, the bond goes into default

Question 13

Examples of Bond Covenants

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2.
3.

Answer 13

• information covenants (providing quarterly and annual reports within certain period or providing budget data)
• financial covenants (leverage, equity ratio, interest cover, minimum liquidity)
• general covenants (restrictions on dividends to shareholders, restrictions on disposition of assets or shareholdings)

Question 14

Sovereign Debt and Types | Definition

Answer 14

• a debt issued by national governments
• securities issued by the US Treasury: Bills (discount), notes, bonds, inflation indexed (coupons)

Question 15

What is TIPS?

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3.
4.

Answer 15

• inflation indexed (security) issued by the US Treasury
• treasury inflation protected securities
• fixed coupon rate, but outstanding principal adjusted for inflation
• RATE is fixed, but dollar coupon varies because semiannual coupon payments are fixed rate of the inflation adjusted principal

Question 16

Call Provisions | Call Date and Call Price

Answer 16

• call feature allows the issuer of the bond the right to retire all outstanding bonds on or after a specific date, the call date, for the call price

Question 17

A callable bond has a….. than an otherwise equal non-callable bond

Answer 17

lower price

Question 18

The yield to maturity of a callable bond is calculated as if the bond…..

Answer 18

were not callable

Question 19

1. Bond traders often quote the yield to call (YTC) because…
2. The YTC is…

Answer 19

1. … the assumption that the bond will not be called is not always realistic
2. …the annual yield of a callable bond assuming that the bond is called at the earliest opportunity

Question 20

Convertible Provisions | Convertible Bonds and Conversion Ratio

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2.
3.

Answer 20

• a way that bonds are retired is by converting them into equity
• some corporate bonds have a provision that gives the bondholder an option to convert each bond owned into a fixed number of shares of common stock at a ratio called the conversion ratio
• such bonds are called convertible bonds

Question 21

often companies issue convertible bonds that are…

Answer 21

… callable

Question 22

By calling the convertible and callable bonds, a company can force bondholders to make their decision to…

Answer 22

… exercise the conversion option earlier than they would otherwise like to

Question 23

1. A convertible bond is worth….. than a otherwise identical straight bond
2. Consequently, if both bonds are issued at par, the non-convertible bond must offer a…
3. A huge misunderstanding is that many people point to the lower interest rates of convertible bonds and argue that therfore convertible debt is….. than straight debt

Answer 23

1. more
2. higher interest rate
3. cheaper

Question 24

Leasing | Definition

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2.
3.
4.

Answer 24

• a contract between two parties: lessee and lessor
• lessee: liable for periodic payments in exchange for the right to use the asset
• lessor: owner of the asset, who is entitled to the lease payments in exchange for lending the asset
• legally, not debt financing, but economically very similar effects - thus, also referred to as a credit substitute

Question 25

Leasing | Benefits for the Lessee

Answer 25

• most leases involve little or no upfront payment
• lease payments operational costs and thus immediately tax deductible for lessee

Question 26

What is meant by “outstanding principal”?

Answer 26

• e.g. lend $100, expect $100 back
• if inflation linked, you get more back
• basically, paying back more of what you expected