Beruflich Dokumente
Kultur Dokumente
DEBT
Ability to service debts
Cost of debt
• Denotes the interest rate paid to bondholders. In the context of valuing firms, if the
capital is debt, the cost of capital is called the cost of debt (synonymous with "yield").
• The after tax cost today of raising long-term funds through borrowing.
Debt
• Debt is a higher priority claim (in liquidation') compared to equity. These payments
must be made, otherwise the firm will be subject to court-ordered bankruptcy or
liquidation. It is also called leverage.
• Money borrowed.
Debt capacity
• Ability to borrow. The amount a firm can borrow up to the point where the firm
value no longer increases.
Debt covenants
• Debt covenants spell out the details of the debt contract. For instance, the level
and the timing of the promised interest rate and principal payments are explicitly
stated. The covenants restrict the ability of the borrower to increase the risk of the
firm after debt is taken on, or drain the assets of the firm. They are also designed to
provide early warning signals if the health of the firm begins to weaken.
Debt displacement
• The amount of borrowing that leasing displaces. Firms that do a lot of leasing will
be forced to cut back on borrowing.
Debt due
• The sum of bank and other notes payable in 12 months or less, and the portion of
long term debt payable within a year.
Debt financing
• Raising money for working capital or for capital expenditures by selling bonds, bills,
www.ftpall.com 3|Page
or notes to individual or institutional investors. In return for the money lent, the
individuals or institutions become creditors and receive a promise to repay principal
and interest on the debt. The other major way of raising capital is to issue shares of
stock in a public offering. See also: Equity Financing.
Debt instrument
Debt leverage
Debt limit
Debt limitation
• A bond covenant that restricts in some way the firm's ability to incur additional
indebtedness.
Debt market
Debt ratio
Debt relief
Debt securities
www.ftpall.com 4|Page
• IOUs created through loan-type transactions commercial paper, bank CDs, bills,
bonds, and other instruments.
• IOUs created through loan-type transactions - commercial paper, bank CDs, bills,
bonds, and other instruments.
Debt security
• Refers to the yearly obligation of interest and principal payable on a bond issue.
Sometimes, the term is used collectively to refer to all debts outstanding.
• Earnings before interest and income taxes plus one-third rental charges, divided by
interest expense plus one-third rental charges plus the quantity of principal
repayments divided by one minus the tax rate.
• An analysis wherein the alternatives under consideration will provide the firm with
the exact same schedule of after-tax debt payments (including both interest and
principal).
Debt swap
• The ratio of total debt to total capital ([short + long term debt] / capital). For long-
term investors, a suggested acceptable percentage is up to 33%. Debt must be
funded in good times and bad, so a company going through a bad slump has a
better chance of recovering if its debt load is not too high. Keep in mind that debt
serves the useful function of helping the company grow. It is up to management to
use it wisely and increase the sales and earnings.
• The ratio identifies the relationship of debt to ownership interest in the firm's
financial structure. A measure of a company's financial leverage, calculated by
dividing Long Term Debt by Shareholders' Equity. A higher debt/equity ratio
generally means that a company has been aggressive in financing its growth with
debt, which can result in volatile earnings as a result of the additional interest
expense.
Debt/equity ratio
Debtor in possession
Degree of indebtedness
Funded debt
• Debt whose holders have a claim on the firm's assets only after senior debt
holder's claims have been satisfied. Subordinated debt.
• A contractual liability between the two parties, the borrower (issuer) and the lender
(saver). Examples include bonds and debentures.
• An obligation having a maturity of more than one year from the date it was issued.
Also called funded debt.
• Often companies need more funds to support their activities than their profits can
provide. Therefore they will borrow money and make interest payments regularly.
Long-term debt describes the debt amount due after one year or more.
Secured debt
• Debt that, in the event of default, has first claim on specified assets.
Senior debt
• Debt that, in the event of bankruptcy, must be repaid before subordinated debt
receives any payment.
• All debt due in the next 12 months. This figure is found on the Balance Sheet under
current liabilities. See also: Long-Term Debt.
Structured debt
• Debt that has been customized for the buyer, often by incorporating unusual
www.ftpall.com 8|Page
options.
Subordinated debt
• Debt over which senior debt takes priority. In the event of bankruptcy, subordinated
debt holders receive payment only after senior debt claims are paid in full.
Total debt
• Companies may have debt due within one year, as well as long-term debt payable
over a longer period of time. The total debt figure includes both kinds of debt. Debt
Trade debt
• Accounts payable.
Unfunded debt
• Debt maturing within one year (short-term debt). See: funded debt.
Unsecured debt
• Debt that does not identify specific assets that can be taken over by the debt holder
in case of default.