WS 7 - Debt Securities (Bonds)

Question 1

Define bond and how does it deliver a return?

Answer 1

Issuer obligates itself to pay principal to bondholder (BH) on a specified date.

Bears interest or issued at a discount to face value at redemption.

Question 2

Commercial Paper

Answer 2

Interim source of finance, appropriate for companies with short term borrowing reqs. i.e. cash flow problems. Can be issued in large amounts but must be repaid w/i maximum of 365 days. Most issues for periods of 1, 3, 6 or 9 months.

Question 3

Whats the catch with convertible bonds?

Answer 3

They pay a lower coupon.

Question 4

ADV of loan financing over bonds

Answer 4

Flexible in amount borrowed
Flexible terms on repayment
Renegotiation of terms
Multi-currency option
Confidential contracts
Loans available to co's of all sizes and credit ratings
Quicker
Perhaps client has existing relationship with the bank

Question 5

ADV of bond financing over loans

Answer 5

Wide investor base
Transferable instruments
Terms and conditions less stringent: far fewer covenants by issuer
Flexible interest rate options
Unsecured (limited exposure and high transferability)
Disclosure limited to public information
Could use CP for speed.

Question 6

MTN: define

Answer 6

Way of issuing bonds quickly and easily.

Set of master documents agreed between issuer and arranger containing standard terms and conditions and other contractual provisions that can be used to do any number of bond issues in the future subject to a maximum limit.

Bond issues under an MTNP are called notes.

Question 7

Situations when would use stand alone issue

Answer 7

If client looking to raise finance for a specific, one-off reason and has no intention of using the money for any further capital outlay in foreseeable future, i.e. an acquisition of another co/ Refinance an existing bridging loan.

Question 8

Situation where may use MTNP

Answer 8

Client seeks to raise significant amounts of finance over a set period for a series of purposes - however it does not need all of the money at once - and would therefore like to draw down the funds as and when it needs i.e. prolonged expansion in a new company.

Question 9

Why do we have no misrepresentation or MAC clauses in bond agreement?

Answer 9

Because investors rely on (heavily regulated) prospectus for all info re. the issuer as opposed to a series of warranties. However, no MAC clause in prospectus (too subjective); Also, no formal representations in the prospectus.