LongTerm Debt

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Chapter 20

• Long-Term Debt

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Chapter 20

• What is the name of the set of bonds issued at
  one time?
• 20.1. Long-Term Debt A Review
• 20.2. The Public Issue of Bonds
• 20.3. Bond Refunding
• 20.4. Bond Ratings
• 20.5. Some Different Types of Bonds
• 20.6. Direct Placement Compared to Public Issues
• 20.7. Long-Term Syndicated Bank Loans
• 20.8. Summary and Conclusion

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20.1. Long-Term Debt A Review

• What is the borderline between short-term and
  long-term debt?
• If a firm is going to fund its debt, what is it
  going to do?
• What is the difference between funded and
  unfunded debt?
• What is the difference between public and private
  debt? What is the latter sometimes called?
• Annual coupons are denominated in dollars paid
  out for how much principal?

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20.2. The Public Issue of Bonds

• What does a bond have that equity does not? This
  is an arrangement with whom? On whose behalf?
• 20.2.A. The Basic Terms
• 20.2.B. Security
• 20.2.C. Protective Covenants
• 20.2.D. The Sinking Fund
• 20.2.E. The Call Provision

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20.2.A. The Basic Terms

• What are two other names for the denomination of
  the bond?
• How do these differ from the par value?
• Does a firm know who owns its bonds?
• What are the bonds called if they do?
• What are the bonds called if they dont?
• Who likes to hold the latter form of bond? What
  are they trying to avoid?

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20.2.B. Security

• What does it mean for a bond to be secured?
• What is it secured with?
• What are two names for secured bonds?
• What are unsecured bonds called?
• Do holders of these receive anything if the
  company goes bankrupt?
• Which is more common, secured or unsecured bonds?

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20.2.C. Protective Covenants

• What is the meaning of positive and negative with
  respect to covenants?
• How might equity holders benefit from debt
  covenants?

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20.2.D. The Sinking Fund

• Are bonds usually paid off at maturity? If not,
  how are they paid off?
• Who manages that money?
• Where does it come from?
• What price do they pay for the bond? Who makes
  that choice?
• How do holders of debt benefit from this?

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20.2.E. The Call Provision

• When bonds are called, is it individual bonds or
  the entire issue?
• What price is paid for the bonds?
• Are most bonds callable right away?
• What is it called if they are not?

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20.3. Bond Refunding

• Is this like a refund at a retail store?
• What is refunded, individual bonds or an issue of
  bonds?
• 20.3.A. Should Firms Issue Callable Bonds?
• 20.3.B. Calling Bonds When Does it Make Sense?

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20.3.A. Should Firms Issue Callable Bonds?

• How does the firm benefit if its bonds are
  callable?
• Does this help or hurt the bondholder?
• How will a bondholder respond to this? What will
  they require to buy a callable bond?
• If markets are efficient, which side will win?

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20.3A. Continued

• What are four reasons why callable bonds might be
  so common?
• Might management know something that bondholders
  dont?
• Is there value that managers could pass on to
  callable bond holders?
• Would might it be beneficial for management to
  get out a bond issue?
• Might equity holders benefit from bonds being
  callable?

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20.3.B. Calling Bonds When Does it Make Sense?

• When should a firm call a bond?
• What risk is there if they do?

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20.4. Bond Ratings

• Are all bonds rated?
• What is the advantage of rating?
• Who rates bonds? What do they get out of rating
  them?
• 20.4.A. Junk Bonds

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20.4.A. Junk Bonds

• What are two alternative names for these?
• What is the rating cutoff between investment
  grade and junk bonds?
• Have these been criticized primarily for what
  they are, or for what certain investors do with
  them?

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20.5. Some Different Types of Bonds

• Are there legal restrictions on creating unusual
  forms of bonds? If not, why are unusual forms
  uncommon?
• 20.5.A. Floating-Rate Bonds
• 20.5.B. Deep-Discount Bonds
• 20.5.C. Income Bonds

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20.5.A. Floating-Rate Bonds

• Whats the common name for these?
• How is the rate determined with these bonds?
• Do the rates change quickly?
• Would an investor generally prefer a bond with a
  constant or a floating coupon?
• As a result, what benefit are they usually
  offered with floaters?

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20.5.A continued

• Would a firm generally prefer a bond with a fixed
  or a floating coupon?
• As a result, what do firms usually contract into
  bonds they issue?
• In what sort of environment would floaters be
  desirable? What risk do they help hedge?
• Can firms and individuals simulate long-term
  floating-rate debt?
• Why dont they?

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20.5.B. Deep-Discount Bonds

• What are four other names for these?
• What dont these bonds pay?
• A firm would find it desirable to issue these
  bonds if it knew what in advance?
• What is the biggest source of risk with issuing
  or owning these bonds?

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20.5.C. Income Bonds

• What are coupons on these bonds tied to?
• Can the firm be forced into bankruptcy if it
  doesnt pay a coupon on these bonds?
• Can you give two reason why these bonds are not
  seen more often?

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20.6. Direct Placement Compared to Public Issues

• Is the majority of debt publicly issued?
• What are two types of direct placement?
• Which generally have higher rates, direct
  placements or public issues?
• What is the firm usually getting in exchange for
  the higher rate?

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20.7. Long-Term Syndicated Bank Loans

• Are most bank loans long or short-term?
• What name is given to how banks make long-term
  loans as a series of short-term ones?
• Who in the financial market generally has an
  excess demand for their loanable funds? An excess
  supply?
• What is the process called of balancing those out?

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20.7 continued

• What rating are these loans?
• What are they called if they have a lower rating?
• Can this type of loan be traded?
• What is the risk associated with this type of
  loan?

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20.8. Summary and Conclusion