Long Term Debt

Bonds

1. Mortgage Bonds - pledged assets as security
2. Debentures - unsecured bond
3. Subordinated Debentures
4. Convertible Bonds - convertible into common stock
5. Indexed Bond - hedge against inflation
6. Zero Coupon Bonds  - no coupon reinvestment risk
7. Junk Bonds

Debt Contract Provisions

1. Bond Indentures - Slides (6-7)
2. Call Provisions - Slides (8-9)
3. Sinking Funds - Slides (11-13)
4. Bond Ratings - Slides (21-22)
• Moodys
• Standard & Poors

Advantages and Disadvantages of Long-Term Debt

1. 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
2. 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