TAILIEUCHUNG - Ebook Corporate finance - Theory and practice (2nd edition): Part 2
(BQ) Part 2 book "Corporate finance - Theory and practice" has contents: Other debt products, bonds, hybrid securities, selling securities, value and corporate finance, valuation techniques, the tradeoff model, choice of corporate structure, mergers and demergers, bankruptcy and restructuring, managing financial risks, managing cash flows,.and other contents. | Chapter 25 BONDS Or “rendering what is fixed, volatile, and what is volatile, fixed” A debt security is a financial instrument representing the borrower’s obligation to the lender from whom he has received funds. This obligation provides for a schedule of cash flows defining the terms of repayment of the funds and the lender’s remuneration in the interval. The remuneration may be fixed during the life of the debt or floating if it is linked to a benchmark or index. The reader should recognise the basic differences between debt and equity. • Debt: ◦ has a remuneration which is independent of the company’s results and is contractually set in advance. Except in some extreme cases (a missed payment, or bankruptcy), the lender will receive the interest due to him regardless of whether the company’s results are excellent, average or poor; ◦ always has a repayment date, however far off, that is also set contractually. For the moment, we will set aside the rare case of perpetual debt; ◦ is paid off ahead of equity when the company is liquidated and its assets sold off. The proceeds will first be used to pay off creditors, and only when they have been fully repaid will any surplus be paid to shareholders. • Equity: ◦ has a remuneration which depends on company earnings. If those earnings are bad, there is no dividend or capital gain; ◦ carries no guarantee of repayment at any date, however far into the future. The only “way out” for an equity investor is to sell to another equity investor, who thus takes over ownership; ◦ is remunerated last, in the event of bankruptcy, only after the creditors have been paid off. As you know, in most cases, the liquidation of assets is not enough to fully pay off creditors. Shareholders then have no recourse, as the company is no longer solvent and equity is negative! In other words, shareholders are fully exposed to company risk, as creditors have the first claim on revenue streams generated by operating assets (free cash flow) and only .
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