BD_SM_c24 - Chapter 24 Debt Financing 24-1. In a public...

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Chapter 24 Debt Financing 24-1. In a public debt offering, a prospectus is created with details of the offering and a formal contract between the bond issuer and the trust company is signed. The trust company makes sure the terms of the contract are enforced. In a private offering there is no need for a prospectus or a formal contract. Instead a promissory note can be enough. Moreover, the contract in a private placement does not have to be standard. 24-2. Requiring coupon payments protects the bondholders from waiting a long time in case the debtor defaults. Without coupon payments default only happens when the bond matures, but by then the corporation might have depleted all of its assets. In contrast, with coupon payments the debtor would be in default the moment it misses one of the coupon payments, and the bondholders can then force the firm into bankruptcy. At this stage, they might be able to get a larger fraction of the value of the original debt than if they waited until maturity. 24-3. A secured corporate bond gives the bondholder the right over particular assets that serve as collateral in case of default. Unsecured corporate bond does not offer such protection to the bondholder. Thus, with an
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This note was uploaded on 10/08/2010 for the course ENGIN 120 taught by Professor Ilan during the Spring '08 term at University of California, Berkeley.

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BD_SM_c24 - Chapter 24 Debt Financing 24-1. In a public...

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