Lesson 13: Debt Financing Flashcards
Name the four types of public debt
- Notes
- Debentures
- Mortgage bonds
- Asset-based bonds
What is a Note?
Unsecured debts with terms of less than 10 years typically.
What are Debentures?
Unsecured debts, typically with terms of 10 years or more.
What are Mortgage bonds?
Debts secured by real property.
What are Asset-based bonds?
Debts secured by assets other than real property.
What is seniority?
Seniority for notes and debentures indicates which ones have priority over the the assets. Most debentures restrict the company from issuing new debt with equal or higher priority over them.
What are the four types of international bonds?
- Domestic bonds
- Foreign bonds
- Eurobonds
- Global bonds
What are domestic bonds?
Issued domestically in local currency, but foreign investors may purchase it.
What are foreign bonds?
Issued locally by a foreign company and sold locally in local currency. In the U.S. they are know as yankee bonds.
What are Eurobonds?
Not denominated in the currency of the country in which they are issued.
What are global bonds?
Combine features of domestic bonds, foreign bonds, and Eurobonds; they are sold in many countries simultaneously, each in its own currency.
What are the two types of private debt?
- Term loans
2. Private placements
What are term loans?
Loans by a bank or a group of banks. Usually these are investment grade. A revolving line of credit allows a company to borrow up to a specific limit, as needed, for a specific time period.
What are private placements?
Loans made by a small group of investors. These are cheaper to issue than public debt since they don’t require a formal prospectus or indenture, but they are not liquid, unlike public debt. However, SEC rule 144A allows trading of this sort of debt deterrent large financial institutions.
What is sovereign debt?
Debt issued by national governments.
What are the four types of debt issued by the U.S. government?
- Treasury bills
- Treasury notes
- Treasury bonds
- TIPS
What are treasury bills?
Terms of 1 year or less and are issued at a discount. Currently they are available for 4, 13, 26, and 52 weeks. They have no coupons; the face amount is paid at maturity.
What are treasury notes?
Terms of over 1 year but no more than 10 years. They have semi-annual coupons. Currently they are available for 2, 3, 5, 7, and 10 years.
What are treasury bonds?
Terms greater than 10 years. Currently the only term issued is 30 years. They have semi-annual coupons.
What are TIPS?
Treasury inflation protected securities, have fixed coupon rates but the principal is adjusted with inflation. The coupon equals the adjusted principal times the semi-annual coupon rate. The maturity value is the higher of the original face amount and the inflation-adjusted face amount. They are issued for 5, 10, and 30 years.
How are treasury securities sold?
By auction. Competitive bids specify a price; non-competitive bids buy the securities at the price that the competitive bids settle for. All successful competitive bids are fulfilled at the lowest price (for bills) or highest interest rate (for other securities) that is accepted.
What are STRIPS?
Treasury notes or bonds with coupons stripped; they are effectively zero-coupon binds. Interest-only is also available. Available on the secondary market.
How are treasury bonds taxed?
exempt from state and local taxes but are taxed on the federal level.
What are municipal bonds?
Issued by state and local governments. They are not taxable on the federal level, and usually the issuing state exempts them from its income tax.
What are general obligation binds?
Payable from the full faith and credit of the issuer.
What are revenue bonds?
Payable only from specific revenue sources; for example, if a revenue bond funds an expressway, interest and principal may only be payable from tolls collected.
What is a double barreled bond?
A general obligation bond with a provision to set aside a particular revenue source to pay its principal and interest.
What are asset-based securities?
Pay interest and principal from cash flows generated by specific assets.
What are mortgage backed securities?
Pay cash flows from proceeds on a portfolio of mortgages. The largest escort of the asset-based securities.
What are examples of government sponsored enterprises offering mortgage backed securities?
Ginnie Mae
Fannie Mae
Freddie Mac
What is Ginnie Mae?
Government National Mortgage Association GNMA. These securities are guaranteed by the U.S. government.
What is Fannie Mae?
Federal National Mortgage Association (FNMA)
What is Freddie Mac?
Federal Home Loan Mortgage Corporation (FHLMC)
What is Sallie Mae?
The Student Loan Marketing Association.
What do Fannie Mae, Freddie Mac, and Sallie Mae have in common?
Though they do not have explicit government guarantees, investors believe the government would not allow them to default, so they have an implicit guarantee. They do have prepayment risk.
What are collateralized debt obligations?
CDOs are debts from asset based loans packaged together.
