396.Lecture.Notes.Bankruptcy.Spring.2011

396.Lecture.Notes.Bankruptcy.Spring.2011 - Corporations,...

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Corporations, Bankruptcies, and Takeovers Economics 396 Martin K. Perry Outline of Lectures: Corporate Bankruptcy Spring 2011 Disclaimer: Any material discussed in this outline that I did NOT discuss in one of the lectures will NOT be covered on the midterm or the final examination. I may have discussed that material in past semesters, but chose not to discuss that material this semester. In addition, these lecture notes do NOT include everything that I discussed in the lectures. Anything that I discussed in the lectures can be covered on the midterm or the final examination. I. Debt and Equity A. Secured Debt: A secured debt arises when a creditor loans money to the debtor corporation and negotiates for “collateral” in the loan contract (security interest in assets of the corporation). We will discuss the significance of collateral in both state debt collection and federal bankruptcy. Mortgage bonds are secured loans that are standardized in the same payment schedule and with the same joint collateral. Bonds are repaid by interest payments annually or biannually (coupon payments) and a principal amount (face value, usually $1000) paid at the end of the term of the bond (e.g., ten years). Mortgage bonds are publicly issued and traded in bond markets. Bonds are promises by the corporation to pay the owners of the bonds. The amount of money raised by a bond issue depends on what investors are willing to pay for the bonds when they are issued, and this will depend on the prevailing interest rates. A commercial mortgage is secured loan privately negotiated with a bank, insurance company, or other lender. A commercial mortgage is an individualized loan with some assets of the corporation as collateral. The payments under a loan contract can be structure in any way. For example, the payments can be 1
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front-loaded in early years or back-loaded in later years, and the prevailing interest rate will determine the exact amount of the payments. [Consumer mortgages on houses are typically structured so that the debtor makes the same monthly payment for a fixed number of years until the amount of the loan is repaid along with interest on the balance due each month.] Trade creditors are suppliers of goods and services to the corporation. At the time they deliver goods to the corporation, trade creditors can become secured lenders to the corporation if they agree to accept payment for the goods in the future but specific their goods as collateral for those future payments. This is equivalent to making a loan to the corporation with the goods delivered as collateral. These loans of secured trade creditors are called “purchase money security interests”. B. Unsecured Debt: An unsecured debt arises when a creditor loans money to the debtor corporation but does not specify any collateral in the loan contract. The payment structures for unsecured loans can be the same as those for secured loans. Debenture bonds are standardized unsecured loans without
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396.Lecture.Notes.Bankruptcy.Spring.2011 - Corporations,...

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