DEBT

Debt
Amount of money that you owe to an individual, business or
government

3 Features of a debt
Principal (face value or maturity value)
Interest (annually, semi-annual)
Maturity date
Facts about debts

-Corporate debt holders have priority to

assets and earnings
-debt holders do not have voting rights
Debt instruments

Paper or written contract that enables the issuing party to raise funds
by promising to repay a lender in accordance to the terms of the
contract

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Types of debt instruments
Short term debts

1 treasury bill
2 repurchase agreement
3 federal funds
4 - bankers acceptance
5 commercial paper
6 certificate of deposit
Types of debt instruments
Short term debts
Treasury Bills
Discounted securities issued by U.S. government to finance
operations
Repurchase Agreement
One firm sells financial asses to another firm with the promise to
repurchase the securities later at a higher price
Federal Funds
Overnight loans from one bank to another
Bankers Acceptance
A postdated check
Commercial Paper
A type of promissory note issued by large financially sound firms
Certificate of Deposit
BONDS
BOND
- long term
- Written contract
- Pay interest and principal
- at specific date or interval
Indenture and Trustee
Indenture
The specific contents of the indenture are the following:

The amount, duration, and denomination of the bond issues;

If applicable, the serial issues and the size of each issues;
The rate of interest , the terms of payment, and the
designated place of collection;
The rights, privileges, or limitation attached to issue;
The type of security and its terms;
Indenture

The terms and conditions of mortgage or pledge of securities,

If any;
The manner of redemption;
The remedies available to bondholders in case of default of
the issuing corporation;
The replacement of mutilated or lost bond certificate;
The duties and remunerations of the trustees;
Trustee
The duties of the trustees are the following:

To represent the bondholder in case of default;

To make payments of interest and principal;
To report annually to the bondholders on his operations and
the condition of the bond issue and its pledged security;
Trustee

To supply lists of bondholders to any bondholders, enabling

the bondholders to form special committees to protect their
interests at any time;
To notify the bondholders of any default
To inform bondholders of any loans by the trustee to the
corporation.
BONDS AS DISTINGUISHED FROM STOCKS
BOND STOCKS
Debt instrument Instrument of ownership
Has the priority over the Payments are contingent upon
payments earnings and must be declared
Interest payments are fixed by the board of directors
Maturity date of repayment of Does not have maturity date
principal is specific
Has voting powers
Bondholders have no vote and
no influence on the
management
BONDS ARE ISSUED THROUGH THESE WAYS
Public offering
The investment banker helps in
the issuing of bonds by:
- Helping the firm determine the
size of the issue and the type of
bond
- Establishing the selling price
- Selling the bond
Private placement
Advantages of private placement:
- The bond can be made to fit in
the needs of the issuing and
investing firm
- It does not have to be registered
- No underwriting fees for the
issuing firm
TYPES OF BONDS
1. BY TYPE OF SECURITY
2. BY MANNER OF PARTICIPATION IN EARNINGS
3. BY METHOD OF RETIREMENT OR REPAYMENT
1. BY TYPE OF SECURITY
Debentures
Mortgage bonds
-real estate mortgage land and property
-chattel mortgages movable and personal property
Assumed bonds and guaranteed bonds
Joint bonds
1. BY MANNER OF PARTICIPATION IN
EARNINGS
Coupon bonds and registered bonds
Income bonds
Participating bonds
Convertible bonds
Bonds with warrants
Bonds with junior security attached
1. BY METHOD OF RETIREMENT OR
REPAYMENT
Serial bonds
Sinking bonds
Callable bonds
Convertible bonds
Perpetual bonds
Reasons for the use of bonds
Bonds are used as instruments of long-term financing for any of the
following reasons:
1. When a franchise or a license is issued to a corporation
providing a guarantee of a certain return on capital investments;
2. When economic conditions allow the payment of interest at a
rate lower than what is paid to common stock in the form of dividends;
3. When the present owners of the corporation want to retain
their share of the voting power;
 4. When investor resistance to the purchase of common stock is
very strong; and when such resistance is not found in the sale of bonds;
5. When the degree of safety offered by the issuer attracts
investors;
6. When tax advantages are derived from the exercise; and
7. When there is a sufficient demand from institutional investors
like banks, insurance companies, and pre-need firms.