– Creditor’s claim on corporation is specified – Promised cash flows – Most are callable
Over half of outstanding bonds are owned by life insurance companies & pension funds Plain vanilla bonds to “kitchen sink” bonds
Sinking funs provide extra protection to bondholders. Sinking funs provide the firm with an option.
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20-8
The Sinking Fund
There are many different kinds of sinking-fund arrangements:
20-4
Features of a Hypothetical Bond
Issue amount Issue date Maturity date Face value Coupon interest Coupon dates Offering price Yield to maturity Call provision Call price Trustee Security Rating Bond issue total face value is $20 million Bonds offered to the public in December 2003 Remaining principal is due December 31, 2023 $1,000 Face value denomination is $1,000 per bond $100 per annum Annual coupons are $100 per bond 6/30, 12/31 Coupons are paid semiannually 100 Offer price is 100% of face value 10% Based on stated offer price Callable after 12/31/08 Bonds are call protected for 5 years after issuance 110 before 12/31/13, Callable at 110 percent of par value through 100 thereafter 2008. Thereafter callable at par. United Bank of Trustee is appointed to represent Florida bondholders None Bonds are unsecured debenture Moody's A1, S&P A+ Bond credit quality rated upper medium grade by Moody's and S&P's rating $20 million 12/15/03 12/31/23
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20-10
Callable Bonds versus Noncallable Bonds
200 175
Noncallable bond
20-0
Chapter Twenty
Long-Term Debt Corporate Finance
Ross Westerfield Jaffe
Seventh Edition
20
Seventh EditБайду номын сангаасon
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– Most start between 5 and 10 years after initial issuance. – Some establish equal payments over the life of the bond. – Most high-quality bond issues establish payments to the sinking fund that are not sufficient to redeem the entire issue.
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20-6
Principal Repayment
Term bonds versus serial bonds Sinking funds--how do they work?
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20-2
20.1 Long Term Debt: A Review
Corporate debt can be short-term (maturity less than one year) or long-term. Different from common stock:
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20-3
Features of a Typical Bond
The indenture usually lists
– – – – – – – Amount of Issue, Date of Issue, Maturity Denomination (Par value) Annual Coupon, Dates of Coupon Payments Security Sinking Funds Call Provisions Covenants
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20-9
20.3 Bond Refunding
Replacing all or part of a bond issue is called refunding. Bond refunding raises two questions:
– Should firms issue callable bonds? – Given that callable bonds have been issued, when should the bonds be called?
75
Callable bond
50
25 0 4 8 12 16 20
– – – – – – – Amount of Issue, Date of Issue, Maturity Denomination (Par value) Annual Coupon, Dates of Coupon Payments Security Sinking Funds Call Provisions Covenants
20-1
Chapter 20 Long-Term Debt
20.1 Long Term Debt: A Review 20.2 The Public Issue of Bonds 20.3 Bond Refunding 20.4 Bond Ratings 20.5 Some Different Types of Bonds 20.6 Direct Placement Compared to Public Issues 20.7 Long-Term Syndicated Bank Loans 20.8 Summary and Conclusions
20-7
Protective Covenants
Agreements to protect bondholders Negative covenant: Thou shalt not: – pay dividends beyond specified amount – sell more senior debt & amount of new debt is limited – refund existing bond issue with new bonds paying lower interest rate – buy another company’s bonds Positive covenant: Thou shalt: – use proceeds from sale of assets for other assets – allow redemption in event of merger or spinoff – maintain good condition of assets – provide audited financial information
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