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Lecture 2

BU473 Lecture Notes - Lecture 2: Commercial Paper, Capital Structure, United States Treasury Security


Department
Business
Course Code
BU473
Professor
David Cimon
Lecture
2

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BU-473 Lecture 2
Debt
Debt offers a fixed stream of payments to investors
o Debt isn’t risk free
o When debt isn’t paid, the issuer has defaulted
Debt is senior in the capital structure
Pricing variation for debt
o Coupons, Senior vs. Junior, Secured, On-the-run
o On the run recently issued and Liquid
Short Term vs. Long Term Debt
Short term debt is 1 year or less term
Long term debt is 2 years or more term
LT Debt has a higher rate than ST
Short-Term Debt Money Market
Market for short-term debt is money market
Short Term Debt T-Bills
Treasury bills are used by governments for ST borrowing
T-Bills have no coupons
In Canada, there are 3,6, and 12-month durations
T-Bills are risk-free, liquid, and pay a higher return than holding cash
Canadian T-Bill formula for Bond Equivalent Yield:
𝑌𝑖𝑒𝑙𝑑 =
𝐹𝑉 𝑃
𝑃
365
𝑛
US T-Bill formula for Discount Yield:
𝑑 =
𝐹𝑉 𝑃
𝐹𝑉
360
𝑛
3 months = 91 days and 6 months = 182 days
Short Term Debt Commercial Paper and Bankers’ Acceptances
Commercial Paper is corporate debt under one year issued by large corporations
o Asset Backed Commercial paper is secured with firm collateral
Small corporations use Banker’s Acceptances
o They establish a line of credit at a bank, when they borrow, the bank sells banker’s
acceptances to clients
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