Module 43.2: Corporate Debt and Funding Alternatives

Question 1

What is a bilateral loan vs. a syndicated loan?

Answer 1

bilateral - funded by a single bank

syndicated loan - group of banks is the syndicate

Question 2

what is commercial paper?

Answer 2

short term debt securities whose interest cost is less than interest on a bank loan. yield slightly higher than short term sovereign debt.

Question 3

what is bridge financing?

Answer 3

debbt that is temporary until longer term financing is secured

Question 4

what is the tenor on US commercial paper vs. Eurocommercial paper?

Answer 4

270 days or less for US

364 days for Eurocommercial

Question 5

What are the two factors a company will face when dealing with rollover difficulties?

Answer 5

1) there is deterioration in a company’s actual or perceived ability to repay the debt
2) significant systemic financial distress, like the 2008 financial crisis.

Question 6

what are backup lines of credit?

Answer 6

the bank agrees to provide the funds when the paper matures if needed, except in case of material adverse change (i.e company’s financial position changes).

Question 7

how is commercial paper typically issued?

Answer 7

at a discount with interest due at maturity (similar to a zero coupon bond)

Question 8

What is a serial bond issue?

Answer 8

bonds are issued with several maturity dates so that a portion of the issue is redeemed periodically.

Question 9

what is considered a short, medium. and long term corporate bond?

Answer 9

short - less than 5 years
medium - between 5 and 12 years
long - more than 12 years/

Question 10

What are MTN’s or medium term note maturities?

Answer 10

issued in various maturities ranging from non months to periods as long as 10 years.

Question 11

What are structured financial instruments?

Answer 11

securities designed to change the risk profile of an underlying debt security, often by combining the debt security with a derivative.

Question 12

What is a credit-linked note?

Answer 12

it’s a yield enhancement instrument that has regular coupon payments, but its redemption value depends on whether a specific credit event occurs.

can be viewed as purchasing a note and simultaneously selling a credit default swap.

Question 13

what are capital protected instruments?

Answer 13

offers a guarantee of a minimum value at maturity as well as some potential upside gain.

for example, purchasing a zero coupon bond and buying a 1 year call option on the reference stock index

Question 14

what are participation instruments?

Answer 14

has payments that are based on the value of an underlying instrument. example are floating rate notes linked to LIBOR or other equity indexes.

Question 15

What are leveraged instruments?

Answer 15

inverse floaters structure with leverage so that the change in the coupon rate in some multiple of the change in the reference rate.

Question 16

What are short term funding alternatives available to banks?

Answer 16

checking accounts provide immediate availability of funds but typically pay no interest. also certificates of deposit (CDs) offer interest bearing securities that generate liquidity.

banks can also borrow reserves from other banks in the central bank funds market.

Question 17

What is a repurchase agreement (repo)?

Answer 17

one party sells a security to a counterparty with a commitment to buy it back at a later date at a higher price. the difference between the selling price and purchase price is the repo rate.

Question 18

What are four characteristics of the repo rate?

Answer 18

the repo rate is:

1) higher the longer the repo term
2) Lower, the higher the credit quality and collateral
3) lower, when the collateral security is delivered to lender
4) higher when the interest rates for alternative sources of funds are higher