Financial Economics

WEB–APPENDIX B

CORPORATE DEBT FUNDING INSTRUMENTS

In our discussions of the capital structure decision in Chapters 5, 22, 23, and 24, we explained the decision of how much debt and equity should be issued. Once the decision of how much debt to issue is determined, the next step is to determine what debt instrument should be issued. The alternatives for corporate management are corporate bonds, medium-term notes, commercial paper, bank loans, and asset-backed securities. In this appendix we describe all these debt-funding instruments except for the last. The question as to why management may want to issue different types of debt is discussed in Chapter 24. A key investment attribute of corporate debt instruments is their credit risk. In Web-Appendix D we describe the various aspects of credit risk and the credit ratings assigned to corporate debt obligations.

B.1 CORPORATE BONDS

The basic features of a corporate bond are (1) maturity, (2) coupon rate, (3) security, and (4) provisions for paying off the debt. For some corporate bonds there is a conversion feature. We describe all of these below.

B.1.1 Maturity

Unlike common stock, which has a perpetual life, bonds have a date on which they mature. The number of years over which the issuer has promised to meet the conditions of the obligation is referred to as the term to maturity. The maturity of a bond refers to the date that the debt will cease to exist, at which time the issuer will redeem the bond by paying the amount borrowed. ...