武汉理工大学：《财务管理》课程PPT教学课件（英文版）Chapter 20 Long-Term Debt, Preferred Stock, and Common Stock

Chapter 20 Long-Term Debt, Preferred stock, and Common Stock 20-1

20-1 Chapter 20 Long-Term Debt, Preferred Stock, and Common Stock

Long-Term Debt, Preferred Stock and common Stock Bonds and their features Types of Long-Term Debt Instruments Retirement of bonds Preferred stock and its Features Rights of common shareholders Dual-class common stock 20-2

20-2 Long-Term Debt, Preferred Stock, and Common Stock Bonds and Their Features Types of Long-Term Debt Instruments Retirement of Bonds Preferred Stock and Its Features Rights of Common Shareholders Dual-Class Common Stock

Bonds and their Features Bond -A long-term debt instrument with a final maturity generally being 10 years or more. Basic Terms Par value Coupon Rate Maturity Bond Ratings 20-3

20-3 Bonds and Their Features Basic Terms Par Value Coupon Rate Maturity Bond Ratings Bond -- A long-term debt instrument with a final maturity generally being 10 years or more

Trustee and Indenture Trustee -A person or institution designated by a bond issuer as the official representative of the bondholders. Typically, a bank serves as trustee Indenture The legal agreement also called the deed of trust, between the corporation issuing bonds and the bondholders, establishing the terms of the bond issue and naming the trustee. 20-4

20-4 Trustee and Indenture Trustee -- A person or institution designated by a bond issuer as the official representative of the bondholders. Typically, a bank serves as trustee. Indenture -- The legal agreement, also called the deed of trust, between the corporation issuing bonds and the bondholders, establishing the terms of the bond issue and naming the trustee

Types of Long-Term Debt instruments Debenture -A long-term, unsecured debt instrument Investors look to the earning power of the firm as their primary security Investors receive some protection by the restrictions imposed in the bond indenture particularly any negative-pledge clause A negative-pledge clause precludes the corporation from pledging any of its assets(not already pledged)to other creditors. 20-5

20-5 Types of Long-Term Debt Instruments Investors look to the earning power of the firm as their primary security. Investors receive some protection by the restrictions imposed in the bond indenture, particularly any negative-pledge clause. A negative-pledge clause precludes the corporation from pledging any of its assets (not already pledged) to other creditors. Debenture -- A long-term, unsecured debt instrument

Types of Long-Term Debt instruments Subordinated Debenture -A long-term, unsecured debt instrument with a lower claim on assets and income than other classes of debt; known as junior debt In this case, subordinated debenture holders rank behind debenture holders but ahead of preferred and common stockholders in the event of liquidation Frequently, the security is convertible into common stock to lower the yield required by subordinated debenture holders (often less than regular debentures). 20-6

20-6 Types of Long-Term Debt Instruments In this case, subordinated debenture holders rank behind debenture holders but ahead of preferred and common stockholders in the event of liquidation. Frequently, the security is convertible into common stock to lower the yield required by subordinated debenture holders (often less than regular debentures). Subordinated Debenture -- A long-term, unsecured debt instrument with a lower claim on assets and income than other classes of debt; known as junior debt

Types of Long-Term Debt instruments Income Bond -a bond where the payment of interest is contingent upon sufficient earnings of the firm Frequently, there is a cumulative feature, which provides that any unpaid interest in a particular year accumulates. The cumulative obligation is usually limited to no more than three years. The bonds are unpopular with investors(usually limited to reorganizations), but are still senior to preferred and common shareholders in the event of 20-7quidation

20-7 Types of Long-Term Debt Instruments Frequently, there is a cumulative feature, which provides that any unpaid interest in a particular year accumulates. The cumulative obligation is usually limited to no more than three years. The bonds are unpopular with investors (usually limited to reorganizations), but are still senior to preferred and common shareholders in the event of liquidation. Income Bond -- A bond where the payment of interest is contingent upon sufficient earnings of the firm

Types of Long-Term Debt instruments Junk Bond--a high-risk, high-yield (often unsecured) bond rated below investment grade. These are bonds with a rating of Ba 's)or lower Principal investors are pension funds, high-yield bond mutual funds and some individual investors Liquidity varies depending on investor sentiments Junk bonds were used frequently in the 1980s as a means of financing leveraged buyouts(LBOs) 20-8

20-8 Types of Long-Term Debt Instruments These are bonds with a rating of Ba (Moody's) or lower. Principal investors are pension funds, high-yield bond mutual funds, and some individual investors. Liquidity varies depending on investor sentiments. Junk bonds were used frequently in the 1980s as a means of financing leveraged buyouts (LBOs). Junk Bond -- A high-risk, high-yield (often unsecured) bond rated below investment grade

Types of Long-Term Debt instruments Mortgage Bond -a bond issue secured by a mortgage on the issuers property The issue is secured by a lien on specific assets of the corporation The market value of the collateral should exceed the amount of the bond issue by a reasonable margin of safety to help protect bondholders 20-9

20-9 Types of Long-Term Debt Instruments The issue is secured by a lien on specific assets of the corporation. The market value of the collateral should exceed the amount of the bond issue by a reasonable margin of safety to help protect bondholders. Mortgage Bond -- A bond issue secured by a mortgage on the issuer’s property

Types of Long-Term Debt instruments Mortgage Bond (Continued) If the corporation defaults, the trustee can foreclose on behalf of the bondholders the bondholders become general creditors for any residual amount after the sale of the collateral The corporation may have have a first mortgage and a second mortgage on the same assets. The first mortgage has a senior claim on the assets 20-10

20-10 Types of Long-Term Debt Instruments If the corporation defaults, the trustee can foreclose on behalf of the bondholders. The bondholders become general creditors for any residual amount after the sale of the collateral. The corporation may have have a first mortgage and a second mortgage on the same assets. The first mortgage has a senior claim on the assets. Mortgage Bond (Continued)