Long term financing Flashcards
What are examples of long term financing
Financial (capital) Lease Preferred Stock Common Stock Bonds/ Bonds Payable Long term notes
Describe LT financing
Consists of sources that constitute capital structure (not financial structure).
Consists of sources on which the WACC is based.
Describe a Net-net lease agreement
the lessee assumes responsibility for both executory costs of the asset (insurance, taxes, maintenance) and for the asset having a pre-est. residual value at the end of the lease.
Describe a net lease agreement
The lessee assumes the executory costs associated with the asset during the lease, including such elements as maintenance, taxes, and insurance.
What are debt covenants?
they place contractual limitations on activities of the borrower to help protect the lender. As such, they reduce the default risk associated with a debt issue and reduce the interest rate on that debt.
What is a restrictive covenant
violation of such on a long tern note can trigger default.
What is the market price of a bond?
will be the present value of the principal amount plus the present value of future interest payments, all at the market(effective) rate of interest (whether the bond is issued at par, at a premium, or at a discount)
What kind of bond issues would have the highest interest rate risk, all other things being equal?
Bond issues with the longest maturity rate and lower stated interest rates. (ones with higher rates will fluctuate less with market fluctuations)
What type of bond is most likely to maintain a constant market value?
floating rate bonds. Because the interest rate changes with changes in the market rate of interest, they maintain a relatively stable market value.
Debenture bonds
Unsecured bonds. No specific asset is designated as collateral. These bonds are considered to have more risk and therefore must provide a greater return than secured bonds. They are more likely to have a higher coupon rate (interest rate) than comparable secured bonds.
Indenture
Contract that states the terms of a bond issued by a corporation
How are mortgage bonds secured?
by a lien on real property
Yield to maturity
(also called the expected rate of return) the rate of retun required by investors as implied by the current market price of the bonds. The current cost of capital for the firms bonds
Current Yield
the ratio of annual interest payments to the current market price of the bond.
Current yield ratio
annual coupon interest/ current market price
