Financial Management Final

Bond is contract between

Issuer, Borrower, and Lender, Investor, Holder

Issuers of Bonds

Corporations, Treasury, Municipal, Foreign

Features that make bond safer for Investors

Higher Prices, Lower Yield

Features that bond worse for investors

Lower Prices, Higher Yield

Maturity

the date when the bond makes its last final payment

Principal / par value

the amount to be paid at maturity in addition to the coupon payment

Coupon

the amount to be paid periodically by the bond.

Coupon Formula

Coupon Rate x Par

Sinking Fund feature

Bond Issuer sets aside money over time to repay part of bond before maturity

Collateral feature

bond that is backed by specific assets of Issuer

Seniority feature

The priority a bond has in getting paid if the company goes bankrupt or is liquidated

Call Feature

The right for the issuer to repay the bond before maturity

conversion feature

Gives the investor, bondholder, the right to convert the bond into a set number of shares of the company’s stock

Warrant Feature

gives the investor the right to buy the compays stock at a fixed price in the future

Restrictive Covenants Feature

Rule written into bond agreements that limits what the issuer can do

Most expensive form of raising capital?

Issuing new stock

Use what to calculate the cost of capital?

after tax cost of debt

WACC measures

the real cost to the firm