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1、,Chapter 24,Principles of Corporate Finance Tenth Edition,The Many Different Kinds of Debt,Slides by Matthew Will,McGraw-Hill/Irwin,Copyright 2011 by the McGraw-Hill Companies, Inc. All rights reserved.,Topics Covered,Domestic Bonds, Foreign Bonds and Euro Bonds The Bond Contract Security and Senior
2、ity Repayment Provisions Debt Covenants Convertible Bonds and Warrants Private Placements and Project Finance Innovation in the Bond Market,Bond Terminology,Foreign bonds - bonds that are sold to local investors in another countrys bond market Yankee bond- a bond sold publicly by a foreign company i
3、n the United States Samurai - a bond sold by a foreign firm in Japan Eurobond market - when European and American multinationals are forced to tap into international markets for capital Global Bonds - very large bond issues that are marketed both internationally (that is, in the eurobond market) and
4、 in individual domestic markets,Bond Terminology,Indenture or trust deed - the bond agreement between the borrower and a trust company Registered bond - a bond in which the Companys records show ownership and interest and principal are paid directly to each owner Bearer bonds - the bond holder must
5、send in coupons to claim interest and must send a certificate to claim the final payment of principal Accrued interest - the amount of accumulated interest since the last coupon payment Coupon the annual or semiannual interest paid on a bond LIBOR - London interbank offered rate - the rate at which
6、international banks lend to one another,Bond Contract,Summary of terms of 8.25% sinking fund debenture 2022 issued by J.C. Penney,Bond Terminology,Debentures - long-term unsecured issues on debt Mortgage bonds - long-term secured debt often containing a claim against a specific building or property
7、Collateral trust bonds - Bonds secured by common stocks or other securities that are owned by the borrower Equipment trust certificate - Form of secured debt generally used to finance railroad equipment. The trustee retains ownership of the equipment until the debt is repaid.,Recovery Rates,Ultimate
8、 Percentage Recovery Rates on Defaulting Debt (1987 2006),Recovery Percentage,Bond Terminology,Asset backed securities (ABS) - the sale of cash flows derived directly from a specific set of bundled assets Mortgage pass through certificates - ABS backed by a package of mortgage pass-throughs,Bond Ter
9、minology,Sinking fund - a fund established to retired debt before maturity Callable bond - a bond that may be repurchased by a the firm before maturity at a specified call price Defeasance - a method of retiring corporate debt involving the creation of a trust funded with treasury bonds,Bond Termino
10、logy,Restrictive covenants - Limitations set by bondholders on the actions of the Corporation Negative Pledge Clause - the processing of giving unsecured debentures equal protection and when assets are mortgaged Poison Put - a clause that obliges the borrower to repay the bond if a large quantity of
11、 stock is bought by single investor, which causes the firms bonds to beat down rated,Bond Terminology,Pay in kind (PIK) - a bond that makes regular interest payments, but in the early years of the bonds life the issuer can choose to pay interest in the form of either cash or more bonds with an equiv
12、alent face value Puttable bond A provision that allows the bondholder to demand immediate payment. This is the central feature in loan guarantees issued by the government.,Straight Bond vs. Callable Bond,Covenants,Debt ratios: Senior debt limits senior borrowing Junior debt limits senior & junior bo
13、rrowing Security: Negative pledge Dividends Event risk Positive covenants: Working capital Net worth,Covenants,Event Risk: An Example,October 1993 Marriott spun off its hotel management business worth 80% of its value. Before the spin-off, Marriotts long-term book debt ratio was 2891/3644 = 79%. Alm
14、ost all the debt remained with the parent (renamed Host Marriott), whose debt ratio therefore rose to 93%. Marriotts stock price rose 13.8% and its bond prices declined by up to 30%. Bondholders sued and Marriott modified its spinoff plan.,What is a Convertible Bond?,Chiquita Brands 4.25% Convertibl
15、e 2016 Convertible into 44.5524 shares Conversion ratio 44.5524 Conversion price = 1000/44.5524 = $22.45 Lower bound of value Bond value Conversion value = conversion ratio x share price,Convertible Bond Valuation Issues,Dividends Dilution Changing bond values,What is a Convertible Bond?,How bond va
16、lue varies with firm value at maturity,default,bond repaid in full,Bond value ($ thousands),What is a Convertible Bond?,How conversion value at maturity varies with firm value,Conversion value ($ thousands),What is a Convertible Bond?,How value of convertible at maturity varies with firm value,default,bond repaid in full,convert,Value of convertible ($ thousands),Bond Warrant Package,Bond and Option Warrants are usually issued privately Warrants
