Chapter 14

Debt is a second major source of financing – borrow money today, pay **_____** __and__ ____

Principal; Interest

In order for a company to be stable, a substantial portion of the firm’s debt will generally be in the form of **______** debt

long term

When there is specific collateral associated with a loan it is considered to be a **____** loan

Secured

A secured loan is less risky, so the lender is more likely to charge a **_____** interest rate

Lower

Long-term debt is often issued in the form of a ______

Bond

A bond is a debt instrument in which **______** (bondholders) lend money to the company

Investors

Failure to meet obligations to **______** puts the organization at peril of bankruptcy

Bondholders

Bondholders can sell their bonds to other investors in bond markets the same way that **_____** are sold in **_____** markets

Stocks; Equity

Bonds can be issued through private placements or public offerings in the same way as **_____** are

Stocks

Bonds are a desirable alternative to bank financing

• They can be for large amounts of money, allowing companies to raise a large amount of _______

• They can extend for long periods of time, providing **__**

debt capital; stability

Bonds are agreements to borrow and repay money

• Bonds typically pay “interest” semiannually (every 6 months)

• The ____ or face value is the amount that will be repaid at the ______ date

Stated; maturity

On the bond issue date, the _________ give the company the market value, or selling price of the bond issue.

bondholders

In turn, the company gives the bondholders a ___________ (at face value) promising to pay periodic interest and to return the principal on the maturity date. 

Bond certificate

At regularly scheduled dates during the life of the _____, the company pays the bondholders interest.

Bond

_______ is calculated as the bond face value times the stated interest rate (listed on the bond) times the amount of time that the bond has been outstanding during the year. 

Interest

On the bond _________, the company pays the bondholder investors the bond’s face value.

maturity date

Longer term to maturity than ____________ issued to banks

Notes payable

While typical bank loan terms range from 2 to 5 years, bonds normally have ________ terms to maturity

20 year

Bond interest rates are usually ______ than bank loan rates

lower

___ __bonds are scheduled for maturity on one specified date, while__ _____ bonds mature at more than one date.

Term; Serial

____ __bonds have specific assets of the issuer pledged as collateral, while__ ______ bonds are backed by the issuer’s general credit standing.

Secured; Unsecured

_____ __bonds can be exchanged for a fixed number of common shares of the issuing corporation.__ _____ bonds have an option exercisable by the issuer to retire them at a stated dollar amount prior to maturity.

Convertible; Callable

Often referred to as credit quality and **_____________**

credit worthiness

Debt rating is related to __**_______**__ risk

* Default is when interest and principal are not paid or the __**________**__ of bond indentures are violated

Default; covenants

Rating agencies assign ratings to debt issues to **_______________**

inform investors

What are the key agencies

Moody’s Investors Service, Standard & Poor’s, Fitch

Two different cash flows (to be paid by the borrower) associated with most bonds are

Periodic “interest” payments; single payment

**_____** payments during the bond’s life

• Usually semiannual

• Referred to as an interest annuity

• Rate is printed on the bond certificate

Periodic “interest”

_______ payment of the principal amount of the bonds at maturity

• Often called face value

• Amount is printed on the bond certificate

Single

• The rate stated in the bond contract

• Used to compute the amount of “interest” paid to bondholders, known as the interest annuity

• is also called  the contract or stated rate rate

Coupon Rate

• The rate that investors expect to earn on a debt security investment

• Used to price a bond issue

• Directly related to default risk; rates will be lower for less risky issuers

• Also known as the yield or effective rate

Market rate

The market rate is the **_____** interest rate

real

Interest is the price you pay to __**______**__ money

This is explicitly what the market rate is: the rate at which your future payments are **______**

Borrow; discounted

The coupon rate (or stated rate) only indicates the amount of the – what the company has promised to pay on a semiannual basis 🡪 **______________**

Interest annuity

PV = Present value

Total amount that a series of future payments is ***_________***

worth today

FV = Future value

* Cash balance obtained after the _____ payment

Last

PMT = Payment

* Payment made each period in an _______

Annuity

RATE = ____________

Interest rate ***per compounding period***

Interest Rate

NPER = Number of periods

* ___________ of payment periods in an annuity

Total number