Corporate Finance Ch. 6

notes, debentures, or bonds

debt securities are typically called...

bond

strictly speaking, means a secured debt; in common usage, this refers to all kinds of secured and unsecured debt

higher

in a make-whole provision, the call price is ___ when the interest rates are lower and vice versa

negative and positive (affirmative)

two types of protective covenants

deferred call provision

Bond call provision prohibiting the company from redeeming the bond prior to a certain date.

registered form

The registrar of a company records who owns each bond, and bond payments are made directly to the owner of record.

specified creditors

in the event of default, holders of subordinated debt must give preference to other______; meaning they will be paid off only after ____ have been compensated

call premium

the difference between the call price and the stated value; usually becomes smaller over time

indenture

the written agreement between the corporation (the borrower) and its creditors

above

generally, the call price is ___ the bond's stated value (par value)

protective covenant

he part of the indenture or loan agreement that limits certain actions a company might otherwise wish to take during the term of the loan, usually to protect the lender's interest

retire a portion of the debt

in a sinking fund, the company makes annual payments to the trustee, who then uses the funds to ____

mortgage trust indenture or trust deed

legal document that describes the mortgage

blanket mortgage

pledges all the real property owned by a company

unfunded debt

short-term debt is sometimes referred to as...

deed of trust

the indenture is sometimes referred to as...

maturity of long-term debt

the length of time the debt remains outstanding with some unpaid balance

public issue and private issue

two major forms of long term debt

1) make sure the terms of the indenture are obeyed 2) manage the sinking fund 3) represent the bondholders if the company defaults on its payments to them

what is the trust company appointed required to do for the bondholders

6 provisions of the indenture

1) basic terms of the bonds 2) the total amount of bonds issued 3) a description of property used as security 4) the repayment arrangements 5) the call provisions 6) details of the protective covenants

examples of positive covenant

1) the company must maintain its working capital at or above some specified minimum level 2) the company must periodically furnish audited financial statements to the lender 3) the firm must maintain any collateral or security in good condition

examples of negative covenant

1) the firm must limit the amount of dividends it pays according to some formula 2) the firm cannot pledge any assets to other lenders 3) the firm cannot merge with another firm 4) the firm cannot sell or lease any major assets without approval by the lender 5) the firm cannot issue additional long-term debt

2 drawbacks to bearer form

1) they're difficult to recover if they're lost or stolen 2) because the company doesn't know who owns its bonds, it cannot notify bondholders of important events

bearer form

A bond issued without record of the owner's name; payment is made to whomever holds the bond. the holder of the bond certificate detaches the coupons and sends them to the company to receive payment

collateral

a general term that frequently means securities (bond and stocks) that are pledged as security for payment of debt; commonly referred to any asset pledged on a debt

negative covenant

a thou shall not type of covenant; limits or prohibits actions that the company might take

positive covenant

a thou shall type of covenant; specifies an action that the company agrees to take or a condition the company must abide by

call provision

allows the company to repurchase, or call, part or all of the bond issue at states prices over a specific period

sinking fund

an account managed by the bond trustee for the purpose of repaying the bonds

debenture

an unsecured bond, for which no specific pledge of property is made

make-whole call

bondholders receive exactly what the bonds are worth if they're called; when bondholders don't suffer a loss in the event of a call, they are made whole

the first part of a bond's life

call provisions are not usually operative during _____; this makes the call provision less of a worry for bondholders in the bond's early years

registered

corporate bonds are usually in ____ form

property not otherwise pledged (the property that remains after mortgages and collateral trusts are taken into account)

debenture holders only have a claim on _____

senior, junior

debts are sometimes labeled as _____ or ___ to indicate seniority

call protected

during a deferred call provision, the bond is said to be _____

note

generally used for debentures if the maturity of the unsecured bond is less than 10 years or so when the bond is originally issued

seniority

indicates preference in position over other lenders

main issue between public and private issue debt

private issue is directly placed with a lender and not offered to he public

long-term debt securities are

promises made by the issuing firm to pay principal when due and to make timely interest payments on the unpaid balance

mortgage securities

secured by a mortgage on the real property of the borrower; usually property involved is real estate (land or buildings)

present value

to determine the make whole call price, we calculate the ___ of the remaining interest and principal payments at a rate specified in the indenture

examples of different sinking fund arrangements

1) can state about 10 years after the initial issuance 2) can establish equal payments over the life of the bond 3) some establish payments that aren't sufficient to redeem the entire issue, thus the possibility of a large balloon payment at maturity