Corporate debt Flashcards
What is the bond market?
Those markets where different types of securities issued by companies or public bodies are traded, all securities not issued by the State (but yes regional governments)
What is the different between shares and debt from the creditors point of view?
Shares: can only claim residual part of the profit, shareholders are last in order of priority, dividends are not tax-deductible, shares have an infinite term, and involve managerial control. Debt: fixed amount with higher priority, first in order of creditors, high priority cash flow, tax-deductible, fixed life and no managerial control involved.
What are the advantages and disadvantages of owning debt?
+ Fiscal benefits and debt required greater managerial discipline
- Possible costs of bankruptcy (direct, indirect), agency costs and loss of future flexibility
What are the fixed income securities issued by companies?
Commercial paper (private bills), notes and bonds (mortgage, securitized and CoCos)
What are mortage bonds?
Financial instruments which are basically bonds that are secured with loans from issuing bank
What are Securitized Bonds?
The bank “bundles” a set of loans with a certain age and guarantee, then the bank placed this package of instrumnets in a vehicle: securitization fund, which pays the bank fot the instruments using the funds obtained from these issues
What are CoCos?
Contingent Convertible Bonds, these are hybrid bonds as they can convert the bond into shares
What are the different types of bond regarding the collateral or how is paid in case of default?
Secure bonds (linked to an asset for repayment in casse of default), unsecured bonds (based on credit risk) or junk bonds (high default risk)
How is the price of a corporate bond calculated?
Its price is the discountend current value of the future coupons and the principal, taking into account interest rates, however the discount rate must be higher as companies hace greater risk
