Chap 015
Chap 015
Chap 015
McGraw-Hill/Irwin
Chapter Outline
15.1 Some Features of Common and Preferred Stock 15.2 Corporate Long-Term Debt 15.3 Some Different Types of Bonds 15.4 Long-Term Syndicated Bank Loans 15.5 International Bonds 15.6 Patterns of Financing 15.7 Recent Trends in Capital Structure
Share proportionally in declared dividends Share proportionally in remaining assets during liquidation Preemptive right first shot at new stock issue to maintain proportional ownership if desired
Equity
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
Ownership interest Common stockholders vote for the board of directors and other issues Dividends are not considered a cost of doing business and are not tax deductible Dividends are not a liability of the firm, and stockholders have no legal recourse if dividends are not paid An all-equity firm cannot go bankrupt
Bond 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
Seniority
Required Yields
The coupon rate depends on the risk characteristics of the bond when issued. Which bonds will have the higher coupon, all else equal?
Secured debt versus a debenture Subordinated debenture versus senior debt A bond with a sinking fund versus one without A callable bond versus a non-callable bond
$0
0
$0
$0
$F
T
T 1
F PV T (1 r )
0 1 2 9 30
29
30
Coupons may have a collar the rate cannot go above a specified ceiling or below a specified floor.
Securitized Bonds
Also called asset-backed bonds Bondholders receive interest and principal payments from a specific asset rather than a specific company or government Mortgage backed securities are the bestknown type of securitized bond, but others include
Car loans Credit cards
Whether we use book or market values, debt ratios for U.S. non-financial firms have been below 50 percent of total financing.
Quick Quiz
Describe the basic characteristics of common and preferred stock. Differentiate between cumulative voting and straight voting. Identify the rights of shareholders and bondholders. How would the following characteristics impact the yield on a bond:
Callable Sinking Fund