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Corporate Financial Management 3e
Emery Finnerty Stowe
Long-Term Debt
Learning Objectives
Describe the four main classes of corporate long-term debt.
Briefly explain the features of long-term debt.
Describe the main characteristics of a Eurobond.
Explain the debt service parity approach to bond refunding.
Calculate advantage of refunding high- coupon debt.
Chapter Outline
Types of Long-Term Debt
Main Features of Long-Term Debt
Designing a Long-Term Debt Issue
Recent Innovations in the Bond Market
International Debt Financing
Bond Refunding
Long-Term Debt and the Principles of Finance
Self-Interested Behavior
Look for the lowest-cost debt alternative.
Two-Sided Transactions
Use acceptable price and other terms.
Signaling
Issuing securities can convey information about the firm.
Risk-Return Trade-Off
Innovative securities may create value if they can reduce investor risk.
Capital Market Efficiency
A market price is the best measure of value.
Long-Term Debt and the Principles of Finance
Options
Incorporate the value of options connected to securities.
Valuable Ideas
Look for value-creating innovative securities.
Comparative Advantage
Underwriters may offer value if they can bear issuing risk more cheaply.
Incremental Benefits
Valuation impact is measured using incremental after-tax benefits.
Time Value of Money
Valuation impact includes properly adjusting for the time value of money.
Types of Long-Term Debt
Secured debt
Mortgage bonds
Collateral trust bonds
Equipment trust certificates
Conditional sales certificates
Unsecured debt
Tax-exempt corporate debt
Main Features of Corporate Debt
Stated maturity
Stated principal amount
State coupon rate of interest
Mandatory redemption (or sinking fund) schedule
Optional redemption provision
Protective covenants
Sinking Fund Requirements
A sinking fund requires the firm to repay the debt in installments, rather than in a lump sum.
Serves as a monitoring device
Reduces the effe