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Chap7Notes - Corporate Debt Securities Corporations issue...

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1 Corporate Debt Securities Corporations issue debt securities to raise long- term and short-term capital. The corporate issuer promises to pay a specified percentage of par value (the coupon payments) on designated dates and to repay par or principal value of the bond at maturity. Investors in the bond markets are creditors and not residual-claimants Interest payments to corporate debt must be paid before dividend payments to equity holders. Corporate Debt Markets Corporate bond market (40%) Bank loans (26%) Commercial paper (23%) Reminder (11%) Medium-Term notes International bonds Asset-backed-securities Features of Corporate Bond Issues Bond Indenture – A detailed contract Term bonds vs. serial bonds Serial bonds are such that specified principal amounts become due on specified dates. Notes vs. bonds Obligations due in under 10 years from the date of issue are called notes. Call and refund provisions Call provision allows the issuer to buy back all or part of the issue before its maturity date. Refunding means to replace an old bond issue with a new one, often at a lower interest cost. Callable vs. Refundable: Refunding restrictions mean that cheaper sources of debt may not be used to refund debt, although debt may still be callable.
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2 Features of Corporate Bond Issues -- Continued Sinking fund provisions Deposit of certain sum with the bond trustee, to be used to retire outstanding debt issue periodically. Balloon maturity: Remainder of the outstanding issue after sinking fund provision. Accelerated sinking fund provision: Option to retire more than the amount stipulated for sinking fund retirement. Put-able Bonds: Right to put debt back to issuer. Convertible Bonds: Right to convert bond into a specified number of shares of common stock. Bonds with Warrants : Right to buy the issuer’s shares of common stock. Features of Corporate Bond Issues -- Continued Security for Bonds Mortgage Bonds : Secured debt by pledge of physical assets Collateral trust bonds: Bonds protected by collateral. Collateral: stocks, notes, bonds etc. will be pledged to satisfy bondholders. Debenture bonds : Not secured by specific pledge of property. Debenture bondholders have the claim of general creditors on all assets of the issuer not pledged specifically to secure other debt.
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