Debt Financing

Question 1

What are the common 4 types of corporate debt? Which ones are secured?

Answer 1

1. Notes (unsecured)
2. Debentures (unsecured)
3. Mortgage bonds (secured - property)
4. Asset-backed bonds (secured - any property)

Question 2

What is the level of seniority of a corporate bond?

Answer 2

The bondholder’s priority in claiming assets in the event of default

Question 3

How do debenture holders protect themselves from bankruptcy?

Answer 3

The issue clauses that restrict companies from issuing new debt with higher seniority. The new debt with lower seniority is called subordinated debenture

Question 4

What are the four categories of international bonds?

Answer 4

1. Domestic Bonds (issued locally, priced at local currency, bought by foreign investors)
2. Foreign Bonds (Intended for local investors, issued by foreign entity, priced at local currency)
3. Eurobonds (sold anywhere, not priced in the country of origin’s currency)
4. Global bonds (sold to one or more markets)

Question 5

Is private or public debt cheaper? Why?

Answer 5

Private debt is cheaper due to the absence of the cost of registration

Question 6

What are the two main types of private debt?

Answer 6

1. Term Loan (Bank loan. If funded by group of bank : syndicated bank loan)
2. Private Placement (for a small group of investors. Cheaper because only promissory note is needed instead of an indenture)

Question 7

What is the main disadvantage of private debt?

Answer 7

It is illiquid

Question 8

What are the four types of “Treasury securities”?

Answer 8

1. Treasury bills (zero coupon maturity < 1 years)
2. Treasury notes ( semi-annual coupons with maturity 1 - 10 years)
3. Treasury bonds (semi-annual coupons with maturity > 10 years)
4. Treasury inflation-protected securities (TIPS) (semiannual coupons adjusted with inflation)

Question 9

Are municipal bonds exempted from federal taxes?

Answer 9

Yes

Question 10

What is Sovereign debt called in the US?

Answer 10

Treasury securities

Question 11

Describe Revenue Bonds and General Obligation bonds

Answer 11

Revenue bonds are backed by the revenues that the project will earn as a result of the debt issued.
General obligation bonds are backed by the full faith and credit of a local government

Question 12

Can municipal bonds default?

Answer 12

Yes. Since 1970, 4% have defaulted

Question 13

What is a Asset-Backed Security? What is the biggest sector of ABS?

Answer 13

A security whose cash flows are backed by the cash flows of its underlying securities.
Biggest sector is MBS

Question 14

What is called an ABS that is backed by another ABS?

Answer 14

Collateralized debt obligation (CDO)