Ch 4 - Corporate Debt Flashcards
(36 cards)
Pros & cons of raising capital through debt
Pros:
-Don’t give up ownership
-Bondholders do not have voting rights
Cons:
-Must pay back borrowed funds plus interest
-Interest and principal payments can be significant
Pros & cons of raising capital through stock (equity)
Pros:
-No need to repay raised capital (money)
-No interest charged on raised capital
Cons:
-Giving up ownership of the company
-Many corporate decisions require shareholder approval
Liquidation priority
Unpaid wages
Unpaid taxes
Secured creditors
Unsecured creditors
Junior unsecured creditors
Preferred stockholders
Common stockholders
Commercial paper
Short-term zero coupon corporate debt
270-day maximum maturity
Exempt from SEC registration
Typically sold in large denominations ($100,000+)
Sold to raise short-term cash
Debentures
Long-term unsecured corporate bonds
Also known as full faith and credit bonds
Riskier than secured bonds
Funded debt
General term for long-term corporate debt
Guaranteed bonds
Backed by a third party’s promise to pay interest and/or principal in case of default
Typical third parties:
-Parent companies
-Insurance companies
Considered unsecured bonds
Income (adjustment) bonds
Issued after company defaults on debt
(risky bonds that come out of bankruptcy)
Only pay interest when the issuer meets the earnings test （income）
High-risk securities
Mortgage bonds
Secured/collateralized by corporate real estate
Commonly issued by utility companies
Liquidation priority
-First mortgage bondholders receive liquidation proceeds first
-Second mortgage bondholders receive leftover liquidation proceeds
Equipment trust certificates
Secured by corporate equipment
Issued in serial form （same issue, mature diff）
Collateral trust certificates
Bonds secured by marketable corporate assets
Convertible bonds
Both preferred stock and corporate bonds can be convertible into common stock of the same issuer.
Investors eligible to make capital gains on stock
Lower rates of return (vs. non-convertible bonds)
Conversion ratio
CR=Par/Convers Price
Conversion price
CP=Par/Convers R
Stock parity price
（bond market price） /（conversion ratio）
Bond parity price
BPP=stock price x conv. ratio
Arbitrage opportunity
Instantaneous profit potential on a security
Anti-dilution covenant
Prevents issuer from performing dilution actions without adjusting the conversion feature
Involved when stock dividends & splits occur
Conversion ratio goes up
Conversion price goes down
Corporate debt market
Most trades occur in the OTC markets （outside of an exchange）
A small number of trades occur on exchanges
Corporate bond quotes
Provided in the percentage of par format
Must be in eighths or reduced from eighth
102 (1/8)=$1021.25
98(3/4)=987.50
1
M = $1,000 par unit when used in quotes
5M = $5,000 par bond
s = coupon (interest rate)
10s = 10% coupon
Zr = zero coupon bond
M’ = references maturity year
M’40 = matures in the year 2040
Certificates of deposit (CDs)
Pay a fixed amount of interest based on principal
The “bank version” of a bond
FDIC insurance
Covers up to $250k of bank deposits
Coverage provided per customer
Jumbo CDs
Large bank deposits made for short periods
$100k minimum denominations
$1 million denominations are common
Trade in the secondary market
FDIC insurance covers up to $250k
Brokered CDs
CDs purchased through broker-dealers
Offer FDIC insurance up to $250k per bank
Multiple brokered CD can be purchased from diff bank accounts in one brokerage account, allowing FDIC>$250k
Suitable for investors seeking a short-term safe cash shelter
various maturities: 1m - 30yr
can be traded in 2nd market prior to maturity (negotiable)
