Bonds(1) - 1-16-11Differences Between Debt and...

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Unformatted text preview: 1-16-11Differences Between Debt and Equity•Debt– Not an ownership interest– Creditors do not have voting rights– Interest is considered a cost of doing business and is tax-deductible– Creditors have legal recourse if interest or principal payments are missed–Excess debt can lead to financial distress and bankruptcy•Equity– Ownership interest– Common stockholders vote to elect the board of directors and on other issues– Dividends are not considered a cost of doing business and are not tax deductible–Dividends are not a liability of the firm until declared. Stockholders have no legal recourse if no dividends are declared– An all-equity firm cannot go bankrupt1-26-22The Bond Indenture•Contract between the company and the bondholders and includes–The basic terms of the bonds–The total amount of bonds issued–A description of property used as security, if applicable–Sinking fund provisions–Call provisions–Details of protective covenants1-36-33Bond Classifications•Registered vs. Bearer Forms•Security–Collateral – secured by financial securities–Mortgage – secured by real property, normally land or buildings–Debentures – unsecured–Notes – unsecured debt with original maturity less than 10 years•Seniority1-46-44Bond Characteristics andRequired Returns•The coupon rate is usually set close to the yield, which depends on the risk characteristics of the bond when issued•Which bonds will have the higher yield, all else equal?...
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This note was uploaded on 04/05/2011 for the course FIN 350 taught by Professor Debruinne during the Winter '11 term at Grand Valley State.

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Bonds(1) - 1-16-11Differences Between Debt and...

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