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)