Ch 16 Bonds Flashcards
(30 cards)
What is long-term debt?
Long-term debt refers to borrowings that are due in more than one year, typically in the form of bonds or loans.
What is the main advantage of long-term debt financing?
Interest payments on long-term debt are tax-deductible, reducing a firm’s tax burden.
What are debt covenants?
Debt covenants are restrictions placed by bondholders in the bond agreement that limit the company’s activities, such as restricting further borrowing or dividend payments.
What does fixed-rate debt mean?
Fixed-rate debt means the interest rate remains constant for the entire duration of the bond’s life.
What does floating-rate debt mean?
Floating-rate debt has an interest rate that changes periodically, typically based on a benchmark like LIBOR.
How does a bond rating affect bond prices?
Higher-rated bonds (AAA, AA) have lower yields due to lower perceived risk, while lower-rated bonds (BBB, junk) offer higher yields to compensate for higher risk.
What is the call provision in bonds?
A call provision allows the issuer to redeem (call) the bond before its maturity, typically when interest rates decrease.
What is yield to maturity (YTM)?
Yield to maturity is the total return an investor expects to earn by holding the bond until it matures, assuming no changes in market conditions.
What is the current yield of a bond?
Current yield is the annual coupon payment divided by the market price of the bond.
What is a zero-coupon bond?
A zero-coupon bond does not pay periodic interest. Instead, it is issued at a discount and pays the full face value at maturity.
What is a strip bond?
A strip bond is a bond where the interest and principal are sold separately. The bondholder receives no interest payments until maturity.
What is the advantage of a floating-rate bond for investors?
The interest rate adjusts periodically, which helps protect investors from rising interest rates.
What is a real return bond?
A real return bond is a bond where the principal and interest payments are adjusted for inflation to protect the purchasing power of the bondholder.
What is a revenue bond?
A revenue bond is backed by a specific revenue stream (e.g., tolls or taxes) that is used to pay bondholders.
What is a Eurobond?
A Eurobond is a bond issued in a currency other than the issuer’s domestic currency and sold outside the issuer’s country.
What is the main disadvantage of debt financing?
Debt financing creates a fixed obligation to pay interest and principal, which must be met regardless of the company’s financial position.
What is the call premium on a bond?
A call premium is the additional amount a bond issuer must pay to redeem a bond before maturity, typically above the face value.
When is it beneficial for a company to call its bonds
It is beneficial to call bonds when interest rates have decreased, allowing the company to reissue debt at a lower cost.
What is net present value (NPV) in bond refunding?
NPV is the calculation of the benefit (cost savings from lower interest payments) minus the costs (call premium, issuance costs), determining whether it’s worthwhile to refund the bonds.
What is the advantage of zero-coupon bonds for corporations?
Zero-coupon bonds provide immediate cash inflows for the company, with no outflow of interest payments until maturity.
What is the disadvantage of strip bonds for investors?
Investors must pay tax on accrued income, but they do not receive any cash payments until maturity.
What are the two types of leases in long-term financing?
The two types are operating leases (no transfer of ownership) and capital leases (may transfer ownership).
What is the benefit of capital leases for companies?
Capital leases allow companies to use the asset with the option to purchase it at the end of the lease term, and the asset is recorded on the balance sheet.
What is the benefit of operating leases for companies?
Operating leases provide flexibility and the lease payments are considered as operating expenses, which are tax-deductible.
