Debt Financing Flashcards
Asset Backed Financing
Small or medium sized companies do not have good enough credit to permit unsecured borrowing
Bank lends contingent on some asset like AR / inventory
Callable Bonds
Can be redeemed before maturity but at a premium price
Protection means cannot be redeemed until certain time
Commercial Paper
2-270 day obligations of idle cash
Flexible rates and can be issued through different channels
More common for large firms
Convertibles
Corporate securities that can be exchanged for another form, at a set price
Appreciate more than bonds and generate higher income than common stock
Sweeten the marketability of preferred or common stock
Fixed Rate
Loan where interest rate does not fluctuate with general market conditions
Floating Rate
Variable interest rate adjusted every ~6 months to reflect money market index
Income Bonds
coupon payments depend on company income and are only paid if the firm’s income is sufficient
Project Finance
financing where repayment comes from the cash flows generated by a particular project
borrows assets are protected if project does not succeed as they are not the source of funds
Secured vs Unsecured
secured bonds are packed by collateral
Senior
claims on assets / debt of senior creditor paid first
Subordinated
Junior claim that is only repayable after higher claim has been satisfied
Senior debt can become unsubordinated
Serial bond
Various maturity dates at regular intervals
Sinking fund
Money accumulated on a regular basis in separate accounts to redeem debt . preferred stock issues
Basically a backup fund
Trading on the equity
if you believe return on assets will be > cost of debt
Finance part of your equity investment with debt
Cost of debt > % ROA
The unlevered firm has a higher % ROE
stockholders are worse off from borrowing
