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Learning Objectives
4. Outline some of the features of innovative
forms of raising long-term financing,
including zero-coupon rate bonds,
floating rate bonds and real return bonds.
(LO4)
5. Outline the characteristics of long-term
lease financing that make it an alternative
form of long-term financing. (LO5)
6. Analyze a lease-versus-borrow-topurchase decision. (LO6)
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LO4
Innovative Forms of Bond Financing
Zero-Coupon Bond / Strip Bond:
– does not pay coupon (interest)
– is issued at a deep discount from face value
– zero-coupon bond was created when coupons stripped from a coupon
bond and were traded separately from the face value
Floating Rate Bond:
– Interest/coupon rate paid on the bond changes with market conditions
Real Return Bond
– principal adjusted for inflation
Revenue Bond
– security based upon cash flow
Eurobond:
– bond issued in a country other than the one in which currency the bond
is denominated
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©2012 McGraw-Hill Ryerson Limited
LO4
Corporate Debt for the Medium Term
• Term Loans
– a loan advanced against capital asset security
– the length of time is 3 to 10 years
– principal and interest payments are monthly or
quarterly with a balloon payment of principal at the
end of the term
• Operating Loans
– Generally advanced based on current asset security
– Payable on demand
• Medium Term Notes (MTNs)
– of 3 to maybe 10 years duration
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©2012 McGraw-Hill Ryerson Limited
LO4
Corporate Debt for the Medium Term
• Mortgage Financing
– a loan advanced against property
– Formal appraisal of the property required
– Terms of 6 months to 10 years
• Asset-Backed Securities
– Current assets sold into a trust
– Firm gets immediate capital in exchange for its assets
– Investor receives a steady return as the receivables
are collected
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©2012 McGraw-Hill Ryerson Limited
LO4
Advantages and Disadvantages of Debt
Advantages:
– interest payments are tax deductible to a firm
– wise use of debt may lower a firm’s weighted average
cost of capital (WACC)
– during inflation, debt is repaid with “cheaper dollars”
Disadvantages:
– interest and principal must always be met when due,
regardless of a firm’s financial position
– poor use of debt may lower a firm’s stock price
– may place burdensome restrictions on the firm
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©2012 McGraw-Hill Ryerson Limited