Chapter 24

Debt Financing

Chapter Outline
24.1 Corporate Debt
24.2 Other Types of Debt

Learning Objectives
1.

Identify typical sources of debt for corporations.

2. Define the following terms: notes, debentures,

mortgage bonds, and asset-backed bonds. Identify
which of these are secured, and which are senior.
3. Identify and define the four broadly defined categories
that comprise international bonds.

24.1 Corporate Debt

Leveraged Buyout (LBO)
When a group of private investors purchase all the
equity of a public corporation and finances the
purchase primarily with ______

Public Debt
The Prospectus
A public bond issue is similar to a stock issue.
Indenture
Included in a prospectus, it is a formal contract
between a bond issuer and a trust company.
The trust company represents the bondholders and
makes sure that the terms of the indenture are
enforced.
In the case of default, the trust company represents the
interests of the bond holders.

Public Debt (cont'd)

Corporate bonds almost always pay coupons
semiannually, although a few corporations have
issued zero-coupon bonds.
Most corporate bonds have maturities of 30
years or less.

Public Debt (cont'd)

The face value or principal amount of a bond is
denominated in standard increments, most often
$1000.
The face value does not always correspond to the
actual money raised because of underwriting fees
and/or if the bond is issued at a _______

Original Issue Discount Bond

Describes a bond that is issued at a discount

Public Debt (cont'd)

Bearer Bonds and Registered Bonds
Bearer Bonds
Similar to currency in that whoever physically _____
the bond certificate owns the bond
To receive a coupon payment, the holder of a bearer
bond must provide explicit proof of ownership by
literally clipping a coupon off the bond certificate and
remitting it to the paying agent.

Public Debt (cont'd)

Bearer Bonds and Registered Bonds
Registered Bonds
The issuer of this type of bond maintains a list of all
holders of its bonds.
Coupon and principal payments are made only to
people on this list.
Almost all bonds today are registered bonds.

Public Debt (cont'd)

Types of Corporate Debt
Unsecured Debt
A type of corporate debt that, in the event of
bankruptcy, gives bondholders a claim to only the
assets of the firm that are _____ already pledged as
collateral on other debt

Public Debt (cont'd)

Types of Corporate Debt
Notes
A type of unsecured corporate debt
Notes typically are coupon bonds with maturities
shorter than 10 years.

Types of Corporate Bonds

Debentures
A type of unsecured corporate debt
Debentures typically have longer maturities than
notes.
Riskier than secured bonds and offers higher yield.

Public Debt (cont'd)

Types of Corporate Debt
Secured Debt
A type of corporate debt in which specific assets are
______ as collateral.

Public Debt (cont'd)

Types of Corporate Debt
Mortgage Bonds
A type of secured corporate debt
Real property is pledged as collateral that
bondholders have a direct claim to in the event of
bankruptcy.
All classes of securities are paid from the same cash
flow source.
Often, the value of the real property is greater than
the amt of the bonds issued- margin of safety

Public Debt (cont'd)

Types of Corporate Debt
Asset-Backed Bonds
A type of secured corporate debt
Specific assets are pledged as collateral that
bondholders have a direct claim to in the event of
bankruptcy.
Can be secured by any kind of asset

Public Debt (cont'd)

Bond Markets
International Bonds
Domestic Bonds
Bonds issued by a local entity and traded in a local
market, but purchased by foreigners
They are denominated in the local currency.

Foreign Bonds
Bonds issued by a foreign company in a local market
and intended for local investors
They are denominated in the local currency.

Public Debt (cont'd)

Bond Markets
International Bonds
Foreign Bonds
Yankee Bonds
Foreign bonds in the United States

Samurai Bonds
Foreign bonds in Japan

Bulldogs
Foreign bonds in the United Kingdom

Public Debt (cont'd)

Bond Markets
International Bonds
Eurobonds
International bonds that are not denominated in the local
currency of the country in which they are issued
Eg: a bond issued by a US company in Asia and pays int. and
principal in ____

Global Bonds
Bonds that are offered for sale in several different markets
simultaneously
Global bonds can be offered for sale in the same currency as
the country of issuance (unlike Eurobonds).

Bond Ratings
Favourably affected by:
Greater reliance on equity (as opposed to debt in
financing the firm);
Profitable operations;
Low variability in past earnings;
Large firm size.

Private Debt
Private Debt
Debt that is not publicly traded
Has the advantage that it avoids the cost of
registration but has the disadvantage of being
illiquid

Private Debt (cont'd)

Term Loans
Term Loan
A bank loan that lasts for a specific term/maturity

Syndicated Bank Loan

A single loan that is funded by a _____ of banks
rather than just a single bank

Revolving Line of Credit

A credit commitment for a specific time period,
typically two to three years, which a company can
use as needed

Private Debt (cont'd)

Private Placements
Private Placement
A bond issue that is sold to a small group of
investors rather than the general public
Because a private placement does not need to be
registered, it is less costly to issue than public debt.

24.2 Other Types of Debt

Finance Leases
Asset-specific debt;
The owner of an asset (lessor) is leased under the
agreement to the borrower (lessee);
The lessee make periodic payment to the lessor for
the use of the asset.

24.2 Other Types of Debt

Sovereign Debt
Sovereign Debt
Debt issued by national governments
U.S. Treasury securities represents the single largest
sector of the U.S. bond market.

Sovereign Debt
The U.S. Treasury issues:
Treasury Bills
Pure discount bonds with maturities up to 26 weeks

Treasury Notes
Semi-annual coupon bonds with maturities of 2 to
10 years