NT_tema_10_English - Module 10. Corporate Debt Market...

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Module 10. Corporate Debt Market Learning Goals Understand the operation of the corporate debt market. Know the different instruments that are traded in this market. Understand the primary and secondary markets and how they work. Understand the issue process and the advantages and drawbacks of issuing debt. Context The Board of Directors of our savings bank, following their successful venture in trading national debt, has decided to offer a new line of services consisting of issuing and trading corporate Fixed Income securities. This basically means understanding the issue process and acting as an intermediary on the secondary bond market. The head of markets has contacted you to brief him on the current situation in this market, as he wants to be sure the board's decision is really the best course of action. Overview 1. Introduction 2. Advantages and disadvantages of issuing debt 3. Instruments 4. Pricing. 5. Secondary market Continuous assessment: No assignment in this module 1
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1. Introduction The bond market includes all those markets where the different types of securities issued by companies or public bodies are traded. This definition includes all securities that are not issued by the state: issues from private companies, state-owned companies, regional governments, City Councils etc. Some example of this type of debt are: (i) Debt from autonomous communities, Town Councils and the Instituto de Crédito Oficial; (ii) State-owned companies: RENFE, RTVE, ADIF, etc.; (iii) Private companies: Telefónica, Repsol, BBVA, savings banks, etc.; and others. The fact that the return is pre-defined does not mean that it is fixed. Fixed Income securities include a coupon, or periodical payment, similar to the interest payments on a savings account. However, the payment of the coupon may not be constant, and can depend on some variable. In this module we will focus on the debt issued by companies. 2. Advantages and disadvantages of issuing debt When implementing new projects, a company needs additional resources. One way of obtaining these resources is using debt. We will not deal with determining the optimum debt threshold. However we will examine the advantages and drawbacks of debt for companies, when compared with alternative forms of obtaining funds. When we consider the order of creditors, shares only have a claim to the residual part of the profits and shareholders are the last in the order of priority over profits. As a result of this, shareholders have low priority in the cashflow of the company. In addition, dividends are not tax deductible. Shares have an infinite term and involve managerial control. Compared to these characteristics, debt means a fixed amount
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This note was uploaded on 02/03/2011 for the course ECON 101 taught by Professor Flora during the Spring '11 term at Universidad Carlos III de Madrid.

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NT_tema_10_English - Module 10. Corporate Debt Market...

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