Types of Long-Term Debt instruments Equipment Trust Certificate -An intermediate-to long-term security, usually issued by a transportation company such as a railroad or airline, that is used to finance new equipment Let us look at an example using a railroad A railroad arranges with a trustee to purchase equipment from a manufacturer. The railroad signs a contract with the manufacturer for the construction of specific equipment When the equipment is delivered, equipment trust certificates are sold to investors 20-11
20-11 Types of Long-Term Debt Instruments A railroad arranges with a trustee to purchase equipment from a manufacturer. The railroad signs a contract with the manufacturer for the construction of specific equipment. When the equipment is delivered, equipment trust certificates are sold to investors. Equipment Trust Certificate -- An intermediate- to long-term security, usually issued by a transportation company such as a railroad or airline, that is used to finance new equipment. Let us look at an example using a railroad
Types of Long-Term Debt instruments Equipment Trust Certificates (Continued) Proceeds plus the railroad downpayment are used to pay the manufacturer. Title of the equipment is held by the trustee and the trustee leases the equi pment to the railroad Lease payments are used to pay a fixed dividend to the certificate holders and to retire a specified portion of the certificates at regular intervals After the final lease payment(all certificates are retired), title to the equipment passes to the railroad 20-12
20-12 Types of Long-Term Debt Instruments Proceeds plus the railroad downpayment are used to pay the manufacturer. Title of the equipment is held by the trustee and the trustee leases the equipment to the railroad. Lease payments are used to pay a fixed dividend to the certificate holders and to retire a specified portion of the certificates at regular intervals. After the final lease payment (all certificates are retired), title to the equipment passes to the railroad. Equipment Trust Certificates (Continued)
Retirement of Bonds Sinking Fund - Fund established to periodically retire a portion of a security issue before maturity. The corporation is required to make periodic sinking fund payments to a trustee Two forms for the sinking-fund retirement of a bond The corporation makes a cash payment to the trustee, which calls the bonds The corporation purchases bonds in the open market and delivers them to the trustee 20-13
20-13 Retirement of Bonds The corporation makes a cash payment to the trustee, which calls the bonds. The corporation purchases bonds in the open market and delivers them to the trustee. Sinking Fund -- Fund established to periodically retire a portion of a security issue before maturity. The corporation is required to make periodic sinking-fund payments to a trustee. Two forms for the sinking-fund retirement of a bond:
Sinking Fund and the Retirement of bonds When bonds are called for redemption, the bondholders will receive the sinking-fund call price. The bonds are called on a lottery basis(by their serial numbers)and published in periodicals like the Wall Street Journal Bonds should be purchased in the open market if the market price is less than the sinking-fund call price. 20-14
20-14 Sinking Fund and the Retirement of Bonds When bonds are called for redemption, the bondholders will receive the sinking-fund call price. The bonds are called on a lottery basis (by their serial numbers) and published in periodicals like the Wall Street Journal. Bonds should be purchased in the open market if the market price is less than the sinking-fund call price