03A Fin 301 Bond valuation Ulearn

03A Fin 301 Bond valuation Ulearn - Valuing Debt Debt Debt...

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1 Valuing Debt Debt ± Debt: contract explicitly spells out ± What cash flows will be received ± When they will take place ± Interest payments are 2 ± Tax deductible by the firm ± Fully taxable to the recipient ± Debt holders have priority claim on a firm's cash flow More on Bonds ± Registered versus Bearer ± Bearer bonds are gone if lost ± Holders of bearer bonds will not be notified of changes in corporate policies 3 ± However, bearer bonds have lower transaction costs
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2 And Yet More ± Debenture ± Subordinate (“Junior Debt”) ± Callable Ret actable 4 ± Retractable ± Convertible ± Zero coupon ± Floating rate ± Income Bonds Wait, there’s more… ± Bond Covenants ± Negative ± Positive ± Repayment provisions 5 ± Sinking Fund ± Bond characteristics, bond yields and prices ± Prices are “stale” ± www.canpx.ca Almost done… Default Risk and Bond Ratings ± DBRS, S&P, Moody’s (charge for ratings) ± Rating reflects ability to pay ± Likelihood of timely repayment ± BBB or better for investment grade 6 ± Firms provide info, so only as good as what is disclosed ± What should happen to a bond’s price if the bond is downgraded? ± Unrated debt (a.k.a. Junk Bonds)
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3 Discount Loans ± Simplest loan ± Borrower gets $ X today ± Repays interest and principle in single payment ± Borrow $683 for 4 years at 10%. Repayment: 7 0 . 000 , 1 $ ) 10 . 1 ( 683 $ 4 =
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This note was uploaded on 11/01/2011 for the course BUSINESS FIN301 taught by Professor Andrew during the Fall '10 term at University of Alberta.

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03A Fin 301 Bond valuation Ulearn - Valuing Debt Debt Debt...

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