AFM 101 Chapter 11 Notes - AFM 101 Chapter 11...

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AFM 101 Chapter 11 Characteristics of long term notes and payable Long term debt can be raised at banks, insurance companies and pension fund companies - Raising debt is known as Private placement - Often called notes payable o a promise to pay a stated amount at one or multiple times. When a company’s need for debt financing exceeds that amount any one creditor can give, then bonds are usually issued - can be traded on the market like stocks - usually has interest over its life on top of the payment of principle o principle also is called face value, par value, or maturity value o usually $1000, but can be any number - stated rate is the rate of interest on the bond, and is usually compounded annually or semi-annually - there are different types of bonds o low risk, low interest (usually for retired people) o higher risk, low interest + unsecured + convertible to common shares o Debenture bond – unsecured o Secured bond (with specific assets) o Callable bond allows issuer to retire bond whenever they want o Convertible bond – allows bondholder to convert to common shares or other securities To issue new bonds, a bond indenture is needed, which is a contract that states the legal provisions of the bond such as : - Maturity date - Rate of interest - Date of each interest payment - Conversion privileges - Covenants – which are things to protect the creditor o limits to other debts the issuer can incur o limits to dividend payments o required amount of financial ratios to see how company is doing company wants less restrictive covenants as it takes away from decision making investors want more restricting covenants for added security o usually reported in the notes of financial statements - bond certificate is a document each bondholder receives indicating they own it. It has all the maturity date, interest and stuff written on it - Trustee is an independent party appointed to represent bond holders Usually long term debts are secured, such as how automobile loans will take your car away if you don’t pay Players in the bond market Underwriter a person/ entity that buys entire issues of bonds from companies and then resells them to individual creditors
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- Those to buy first then sells is called firm commitment underwriter - Those who just sells bonds of company without buying then first are called best efforts underwriter They usually sell to banks insurance companies, and mutual/ pension fund (institute investors) Default risk is the probability a bond holder will not be able to meet the requirements specified on the indenture. - Several firms specialize in calculating this probability - This default risk impacts one’s credit rating as well - It is on going, so changes on the fly Why do bond prices change?
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