306: Lecture 7 - Bond Valuation and Interest Rates

Indenture

contract between company and bondholders (increases the credibility that the firm will pay back the money)

Covenants

restrictive clauses in bonds => requirements to make sure that the firm behaves

ex: restrict dividends payout if unable to meet payments

ex: requiring firm to honor payment in a timely matter

Seniority

priority of the payments by default

Collateral

description of property being used as collateral

Sinking Fund

money put aside (into account managed by a third party) to repay bondholders at maturity (payments made periodically)

=> shows that the company is making an effort towards paying back the bond

Call provisions

allows the company/borrower (“bond issuer”) to repurchase the bond

Callable: firms is able to retire bond early by paying money (can clear their financial obligations earlier)

What is the priority of payment if the company is to default (go bankrupt)

Senior Debt, Subordinate Debt, Preferred Equity, Common Equity

Preferred Equity

givers regular payment forever; no ability to vote (paid more than common if in debt)

Mortgage Security

secured by a mortgage on the real property of the borrower; collateralized debt contract => lower interest rate and higher trust that money will be paid back

Debenture

unsecured bond without collateral (backed solely by the creditworthiness of the borrower)