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Financial Markets > Chapter 4: Long-Term Financing Debts > Flashcards

Chapter 4: Long-Term Financing Debts Flashcards

1
Q

usually paid on installment

A

Debt

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2
Q

are incurred to purchase capital assets such as land, buildings, and machinery equipment

A

Long-Term Debts

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3
Q

advantages of issuing long-term debts

A
  1. Unlike dividends declares, the interests can serve as a “tax shield”.
  2. Long-term debts help increase a firm’s EPS.
  3. The repayment of a long-term debt (in pesos) is cheaper during times of inflation.
  4. The outstanding shares of stock are not diluted because new shares of stock are not issued.
  5. The issuer of the bond enjoys financial flexibility because of the call provision in the bond indenture. A call provision permits a firm to redeem the bonds before the maturity date.
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4
Q

disadvantages of issuing a long-term debt

A
  1. A scheduled interest payment is required regardless of the firm’s actual earnings.
  2. A firm with a considerable amount of outstanding loans does not project a “healthy” financial position.
  3. Companies with high financial leverage normally pay a higher interest due to their low credit rating.
  4. A covenant provision in the indenture which subjects a firm to certain constraints is very common.
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5
Q

debt financing is advisale in the following situations:

A
  1. The firm’s revenues and earnings are stable
  2. The firm has adequate liquidity and determinable cash inflows.
  3. The firm has a low debt-to-equity ratio.
  4. Inflation is expected.
  5. The indentures on the debt contract are not burdensome.
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6
Q

two major forms of long-term debts

A
  1. Publicly Issued Obligations
  2. Direct or Private Placement
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7
Q

obligations which are issued publicly

A

Publicly Issued Obligations

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8
Q

obligations placed by individuals directly to a company for the purpose of lending money

A

Direct or Private Placement

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9
Q

obligations granted by banks or other financial institutions to the borrower that uses real estate or movable assets as collateral

A

Mortgages

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10
Q

borrower

A

Mortgagor

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11
Q

lender

A

Mortgagee

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12
Q

advantages of using a mortgage

A
  1. Lower interest rate
  2. Less covenants on financing
  3. Extended maturity dates on the payment of the principal and interest
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13
Q

examples of negative covenants

A
  1. Acceleration clause
  2. Prohibition on making additional loans
  3. Disallowing the collateral to be used in obtaining additional loans
  4. Limitation on the amount of dividends
  5. Restriction on investing
  6. Restriction on merging with another company
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14
Q

provides the issuer of the bonds with the right to redeem the bonds previously issued before the maturity date, thus enabling the corporation to pay-off the bonds due

A

Call Provision

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15
Q

greater than the par value of the bond

A

Call Price

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16
Q

difference between the call price and the par value

A

Call Premium

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17
Q

calls that are not operative during the early years of the callable bonds

A

Deferred Call

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18
Q

bonds that are not operative during the early years of the callable bonds

A

Conversion Provision

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19
Q

issued at a premium or discount are amortized from the time they were issued until the date of maturity instead of the date of conversion

A

Convertible Bonds

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20
Q

retirement of bonds may be done in several ways

A
  1. Payment of the maturity date
  2. Conversion, if the bonds issued are convertible
  3. Call, if the bonds have call feature
  4. Periodic payment, if the bond issued are sinking-fund issues
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21
Q

it is a provision which requires the issuing corporation to set aside an amount to pay-off the bond issuances

A

Sinking-Fund Provision

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22
Q

two forms of sinking-fund provision

A
  1. The trustee requires cash payment from the corporation that issued the bonds. From the payment received, the trustee then calls the bonds the sinking-fund call price.
  2. The bonds are purchased in the open market.
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23
Q

it is a certificate of the bonds issued by evidence

A

Bond Certificate

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24
Q

it is a certificate of the bonds issued by evidence

A

Bond Certificate

25
Q

it is a certificate of the bonds issued by evidence

A

Bond Certificate

26
Q

it is a bond that earns interest on a specific intervals, normally a period of six months

A

Interest-Bearing Bond

27
Q

the interest payment of the bondholder

A

Nominal Interest

28
Q

bond is sold below its face value

A

Discount

29
Q

bond sold above its face value

A

Premium

30
Q

it is a bond that bears no interest but is sold at a very big discount

A

Non-Interest-Bearing Bond

31
Q

most bonds do not have any specific security attached to them

A

Unsecured Debentures

32
Q

it is so-called because particular assets are attached to it

A

Secured Debenture

33
Q

real estate collateral is involved

A

Mortgage Bonds

34
Q

types of bonds

A
  1. Term bonds
  2. Serial bonds
  3. Secured bonds
  4. Unsecured bonds
  5. Registered bond
  6. Coupon or bearer bonds
  7. Convertible bonds
  8. Callable bonds
  9. Guaranteed bonds
  10. Junk bonds
  11. Floating-rate bonds
35
Q

it is a bond that mature on a single date

A

Term Bonds

36
Q

it is a bond in which the principal amount matures in a series of payments rather than a single payment

A

Serial Bonds

37
Q

it is a bond issued with fixed assets pledged as collateral

A

Secured Bonds

38
Q

bonds under secured bonds

A
  1. First mortgage
  2. Second mortgage
  3. Open-end mortgage bond
  4. Collateral trust bond
  5. Equipment obligation bond
39
Q

also known as a closed-end mortgage bond

A

First Mortgage

40
Q

it is a one with a less favored or mortgaged for the first time

A

Second Mortgage

41
Q

this type of bond is not commonly accepted by bondholders because it treats the claims of the second mortgagee and the first mortgages equally

A

Open-End Mortgage Bond

42
Q

the investment securities owned by a firm can be used as a collateral of the issuing firm

A

Collateral Trust Bond

43
Q

if the equipment is used as a collateral to a bond issuance

A

Equipment Obligation Bond

44
Q

it is a bonds issued without collateral

A

Unsecured Bonds

45
Q

it may include negative pledge clause or an equal and ratable security clause

A

Debenture

46
Q

bonds under unsecured bonds

A
  1. Debenture Bond
  2. Subordinated Bond
  3. Income Bond
47
Q

the claims under this type of bond are inferior to the claims of the other creditors enumerated in the bond indenture

A

Subordinated Bond

48
Q

the bondholders of this kind of bond received interest only when the firm has a sufficient income

A

Income Bond

49
Q

it requires that the name of the bondholders be registered in the books of the corporation

A

Registered Bond

50
Q

are bonds where a sheet of coupon is attached to the bond certificate

A

Coupon or Bearer Bonds

51
Q

the holders can change the bonds for a predetermined number of shares of corporate stock

A

Convertible Bonds

52
Q

bonds which may be called for redemption prior to the maturity date

A

Callable Bonds

53
Q

are made when a company or individual (other than issuing company) accepts the obligation to pay the interest and pincipal case of default

A

Guaranteed Bonds

54
Q

are high-risk, high yield bonds issued by companies that have numerous outstanding obligations or that are in a weak financial condition

A

Junk Bonds

55
Q

are a type of bond where the interest payment changes due to the fluctuations in the interest rate

A

Floating-Rate Bonds

56
Q

it is the one who accepts the guarantee of payment

A

Guarantor

57
Q

characteristics of repayment capacity

A
  1. Leading market positions in well-established industries.
  2. High rates of return on funds employed.
  3. Conservative capitalization structures with moderate reliance on debt and sample asset protection.
  4. Broad margins in earnings coverage of fixed financial charges and high internal cash generation
  5. well-established access to a range of financial markets and assured sources of alternative liquidity.
58
Q

also known as bond refinancing

A

Bond Refunding

59
Q

ways to pay-off sinking funds

A
  1. It can call a given percentage of the bonds at a stipulated price per year.
  2. It can buy its own bonds in the open market.

Financial Markets (6 decks)

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