Corporate Finance Theory and Practice, Third Edition

Chapter 22

OTHER DEBT PRODUCTS

What a choice!

In the previous chapter, we first presented the bond as a debt product and we illustrated the key features of a debt product through this simple security. The reader will now discover that there are actually a very large number of products that follow the same logic as that of a bond: remuneration independent from the financial performance of the firm and commitment to reimburse.

Before plunging headfirst into a discussion of existing products, we shall examine their general features and the investment selection criteria applied by corporate treasurers. We shall see further on that financing can be far more than just a financial resource and that it can raise quite complex issues. This is especially true with structured financing, which has shaken the foundations of capital structure policies. We will end the chapter with a roundup of investment products.

Section 22.1

SHORT-TERM MARKETABLE DEBT SECURITIES

The term bond (see previous chapter) is used to refer to marketable securities with maturity of over one year but firms can also issue shorter-term instruments.

Commercial paper refers to negotiable debt securities issued on the money market by companies for periods ranging from 1 day to 1 year. In practice, the average maturity of commercial paper is very short, between 1 and 3 months. Issuers can also launch variable-rate commercial paper linked with a variable-rate/fixed-rate swap (see Chapter 49) or paper denominated in US dollars ...