Lesson 13: Debt Financing Flashcards
prospectus
describes the offering of the public debt securities that corporation issues
indenture
a formal contract between the bon issuer and a trust company (represents bondholders) in indenture
original issue discount
= face amount - sales price
4 types of public debt
- Notes: unsecured debt, term < 10
- Debentures: unsecured debts, term >= 10
- Mortgage bonds: debts secured = property
- Asset-based bonds: Debts secured = assets other than real property
Seniority
indicates which ones have priority over the assets
Subordinated
Subordinated debts: debts that are junior to other debts
4 types of international bonds
- Domestic bonds: issued domestically in local currency, foreign investors may purchase it
- Foreign bonds: issued locally = a foreign company, in local currency (Yankee bonds in US)
- Eurobonds: not denominated in the currency of the country in which they are issued
- Global bonds: combine feature of 1,2,3; sold in many countries simultaneously, each in its own currency
2 types of private debt
- term loans: loan from a bank/ a group of banks for a specific amount that has a specific repayment schedule, term loans are investment grade
- Private placements: loan from a small group of investors, cheaper to issue than public debts (dont require prospectus, indenture)
Sovereign debt
debt issued = national gov
The US gov issues 4 types of debt
- Treasury bills: term <= 1 year, issued at a discount, no coupons, face amount is paid at maturity
- Treasury notes: 1 year < term <= 10 years, semi annual coupon
- Treasury bonds: term > 10 year, semi-annual coupon
- TIPS: Treasury inflation protected securities, fixed coupon rates, principal is adjusted with inflation, coupon = face amount (adjusted with inflation) * semi-annual coupon rate
Selling treasury securities
sold = auction, competitive bids a price, non-competitive buys securities at that price, all successful competitive bids are fulfilled at lowest winning price / highest interest rate
STRIPS
available on secondary market, are Treasury notes or bonds with coupons stripped
Treasury bonds (tax)
exempt from state and local taxes, taxable on federal level
Municipal bonds
issued = state and local gov, NOT taxable on federal level, states exempts them form its income tax, pay semiannual coupons, have floating/ fixed coupon
3 types of municipal bonds
- General obligation bonds: backed = issuer credit worthiness, ability to levy taxes from its residents
- Revenue bonds: issued to fund public projects which then repay investors from the income created by that project
- Double-barred bond: backed = both a defined source of revenue (other than property taxes) and the full faith and credit or taxing power of the issuer
Asset-based securities
pay interest and principal from cash flows generated = specific assets, largest sector: mortgage based securities
Examples of government-sponsored enterprises offering mortgage based securities
- Government National Mortgage Association (GNMA or Ginnie Mae): guaranteed = US gov
- Federal National Mortgage Association (FNMA or Fannie Mae)
- Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac)
Student Loan Marketing Association
- known as Sallie Mae, securities = student loans
Risk of Sallie Mae, Fannie Mae, Freddie Mac
- not guaranteed by gov, but have implicit guarantee (investors believe that gov would nor allow them to default)
->little or no default risk - have prepayment risk
Collateralized debt (CDOs)
- debts from asset-based loans may be packed as collateralized debt obligations, these packages may be split into tranches with different priorities
