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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) 1 of 35 ©2012 McGraw-Hill Ryerson Limited 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 2 of 35 ©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 3 of 35 ©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 4 of 35 ©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 5 of 35 ©2012 McGraw-Hill Ryerson Limited