Management and Organizational Studies 2310A/B Lecture Notes - Lecture 12: Callable Bond, Uptodate, Zero-Coupon Bond

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Chapter 7 – Part 2
7.2 More on Bond Features
Dierence between debt and equity:
Debt
oNot an ownership interest
oBondholders do not have voting rights
oInterest is considered a cost of doing business and is tax
deductible
oBondholders have legal recourse if interest or principal
payments are missed
oExcess debt can lead to %nancial distress and bankruptcy
Dierences b/n Debt and Equity cont.
Equity
oOwnership interest
oCommon shareholders vote for the board of directors and
other issues
oDividends are not considered a cost of doing business and
are not tax deductible
oDividends are not a liability of the %rm and shareholders
have no legal recourse if dividends are not paid
oAn all equity %rm can not go bankrupt
The Bond Indenture-long-term bond
Written agreement/contract between the borrower and creditors
detailing the terms of debt issue.
oType of the debt security: notes, debentures, or bonds
oTerms of a bond: Registered vs. Bearer
oSecurity, if applicable: e.g. collateral and mortgages,
secured vs. debenture
oSeniority: senior vs. junior
oSinking fund provisions: Account managed by the bond
trustee for early bond redemption
oCall provisions
oProtective covenants: negative (shou shalt not) vs. positive
(shou shalt)
Bond Characteristics and Required Returns
The coupon rate depends on the risk characteristics of the bond
when issued
Which bonds will have the higher coupon, all else equal?
oSecured debt versus a debenture
oSubordinated debenture versus senior debt
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