Long Term Debt Bonds
- Mortgage Bonds - pledged assets as security
- Debentures - unsecured bond
- Subordinated Debentures
- Convertible Bonds - convertible into common stock
- Indexed Bond - hedge against inflation
- Zero Coupon Bonds - no coupon reinvestment risk
- Junk Bonds
Debt Contract Provisions
- Bond Indentures - Slides (6-7)
- Call Provisions - Slides (8-9)
- Sinking Funds - Slides (11-13)
- Bond Ratings - Slides (21-22)
Advantages and Disadvantages of Long-Term Debt
- Advantages
- Cost of debt is independent of earnings
- Cost of debt is lower than that of common stock
- Owners do not have to share control
- Disadvantages
- Fixed charges could force bankruptcy
- Financial leverage increases firm risk
- Contractual restrictions
- Overall borrowing limit is impacted
Factors that Influence Long-term Financing Decisions |