Chapter 6 - Principles of Finance – FIN 3100 Chapter 6...

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Unformatted text preview: Principles of Finance – FIN 3100 Chapter 6 – Bonds and Bond Valuation 1 Patty Robertson Agenda • Understand important bond features and the different types of bonds. • Understand how bond prices (values) are calculated and why they fluctuate. 2 Abbreviations 3 Debt Versus Equity • A firm makes Capital Structure ( funding) decisions by deciding how to raise money (debt or equity) to support spending decisions. 4 Assets $1,000 Debt $400 Equity $600 Total Assets $1,000 Total Debt & Equity $1,000 Balance Sheet Debt Versus Equity • Which is more risky…debt or equity? ▫ Bondholders get interest payments before stockholders have a claim on any cash. ▫ If interest payments are not paid, bondholders can force a firm into bankruptcy and have a claim to the assets. 5 Debt Versus Equity • Debt ▫ Not an ownership interest. ▫ Reward limited to loan repayment. ▫ Defined maturity date. ▫ Creditors do not have voting rights. ▫ Interest is tax-deductible. ▫ Creditors have legal recourse if interest or principal payments are missed. ▫ Excess debt can lead to financial distress and • Equity ▫ Ownership interest. ▫ No limit to reward of ownership. ▫ No maturity date. ▫ Common stockholders vote to elect the board of directors. ▫ Dividends are not tax deductible. ▫ Dividends are not a liability of the firm until declared; stockholders have no legal recourse if dividends are not declared. 6 Debt Versus Equity • Bonds – Chapter 6 • Stocks – Chapter 7 7 Debt versus Equity http://www.youtube.com/watch?v=rs1md3e4aYU Types of Debt • On the debt side, the firm can borrow money or issue corporate bonds . ▫ Even though the term can be long, debt is considered temporary financing since it must be repaid. 8 Assets $1,000 Debt $400 Equity $600 Total Assets $1,000 Total Debt & Equity $1,000 Balance Sheet Bonds • Firms might choose to issue (sell) bonds to raise long-term funds for its spending decisions. • The firm accepts money from investors today and, in return, agrees to pay back periodic fixed interest payments with the full principal amount paid at maturity. • Frequently, the bond is unsecured, and based on the credit- worthiness of the firm. • Newly issued bonds are sold in the primary markets based on the advice of investment bankers on timing and terms. 9 Bonds • In the last chapter, we learned about interest- only loans, where only interest is paid until maturity when the full principal amount is due....
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This document was uploaded on 11/03/2011 for the course FIN 3100 at Kennesaw.

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Chapter 6 - Principles of Finance – FIN 3100 Chapter 6...

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