LT (7) Many different types of debt Flashcards
What is a debenture?
Debentures: long-term corportate bond (> 10 years)
Debenture: long-term secured debt (in UK), long-term unsecured issues (in US)
What is a Commerical Paper and Notes?
Commerical Paper and Notes: short-term corporate bond (< 10 years).
What is the face value?
Face value: principal at maturity, often 1,000
What is the coupon?
Coupon: interest payment
What is the yield?
Yield: the discount rate for future payments
What is accured interest?
Accrued interest: the amount of accumulated interest since the last coupon payment.
What is the dirty price?
‘Dirty’ price: the actual price you pay to purchase a bond (i.e. PV of future cash flows)
dirty price = quoted (‘clean’) price + accrued interest
What is a foreign bond?
Foreign bond – local-currency denominated bond that is issued/sold by a foreign company to investors in the local market.
Bulldog bond - a £-denominated bond sold by a foreign company in the U.K.
Similarly, Samurai and Yankee bonds are sold by a foreign firm in Japan and the US respectively
What is a euro bond?
Eurobond – bond that is underwritten by international bond syndicates and sold in several national markets in a major non-local currency (e.g. US dollar)
What is a Global Bond?
Global Bond - very large bond issue that is marketed both internationally (that is, in the eurobond market) and in individual domestic markets
What are credit ratings?
Corporate Bonds carry the possibility of default.
Agencies (e.g. Fitch Investors Service, Moodys, Standard & Poors) provide ratings to indicate the likelihood of default
What is the difference secured vs insecured debt?
Unsecured: no collateral, backed by the company’s creditworthiness
Secured: lender can seize collateral upon default.
Debenture: long-term secured debt (in UK), long-term unsecured issues (in US) Mortgage bonds: long-term debt secured by a firms property Asset-backed securities: securities backed by a portfolio of assets.
These include collateralized mortgage and debt obligations (CMOs, CDOs)
What is seniority?
Who gets paid first in bankruptcy?
Senior > Subordinated (Junior)
Secured > Unsecured
Debtholders > Equityholders (‘Absolute priority’)
Why would anyone accept junior debt?
It’s riskier, so the yield (return) is higher.
What is the recovery rate?
Recovery rate: the percentage an investor gets back in bankruptcy.
What is a sinking fund?
Its a form of repayment provision.
Sinking fund
A lumpy repayment of the entire principal can be disruptive.
A sinking fund is a established to retire debt gradually before maturity
The firm is obligated to make regular payments into the sinking fund.