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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
Note
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