Debt: Types and Features Flashcards
order of repayment
Creditors:
1. liquidator
2. fixed charge holders
3. preferential creditors
4. floating charge holders
5. unsecured creditors
6. subordinated loan stock
Owners:
7. preference shareholders (NV excludes participating shares)
8. ordinary shareholders
9. deferred shareholders
10. warrants
uk government index linked securities
> coupon and capital are related to the RPI.
market price is fixed by supply and demand.
primary reason for investing in strips
Strips allow fund managers to match the timings of cash flows to their liabilities
call provision
gives the company the right to BUY bonds back: i.e. the right to redeem
put provision
allows the holder to force the issuer of bonds to redeem them early: i.e. the investor can SELL them back early
mechanism by which losses are absorbed
> Converting debt to equity
writing down the principal owed
COCO’s triggers
mechanical trigger - bank’s capital ratio below certain level
discretionary trigger - regulator’s opinion on bank solvency
foating rates gilts pay
quarterly coupons
conventional gilts have fixed coupon and redemption dates
shorts <7y
medium 7-15y
long >15y
non-conventional irredemable bonds
1966 aft
redeemed in 1966 and afterr
redeemed at gvmnts discretion
index linked bonds
coupons and redemptions linked to UK Retail price index
> 3 motnhs prior to payment
> for index linked gilt issued before Sept 2005 the RPI is 8 mnths
double dated gilts
categorised by their second date
convertible gitls
converted to ore-defined amounts of a gilt
> short - to medium bonds converted to long
floating rate gilts
variable coupon
coupon is set by a market interest rate at beginning of each interest payment
pay quarterly coupon
trade near par
STRIPS market
GEMMs
Treasury
BoE
if GEMMs MM then on strips market participants list
coupons redeemed on 7 June to 7 December
gilt repo
party sells gilts and then repurchases it at an agreed price and date
reverse repo (opposite)
repoer wants to enhance liquidity
reverse repo to cover short position
term repos
maturity dates in excess of overnight
open repo
no fixed time of repurchase
interest on corporate debt
fixed or variable
indenture
bonds terms and conditions
sinking funds
enable issuer to repay part of nominal value each year prior to redemption
protective covenants
designed to protect cash flows from undue risk
limitations:
> profit distributed as dividends
> debt raised and ranking of debt
> director remuneration
convertibility
bond converted into a number o equities
> low risk way for equity price increase
secured debt securities: floating charge (debentures) and fixed charge (mortgage bonds)
bond floating charge over assets secured against an asset CLASS
fixed charge over assets secured against a specific firm asset
