Debt Financing

Question 1

What are the two types of debt?

Answer 1

1. Private

2. Public

Question 2

What is a public debt?

Answer 2

Securities that corporation issues.

Must include : prospectus and indenture

Question 3

What is an indenture?

Answer 3

Formal contract between bond issuer and trust company

Question 4

What is the Face amount ?

Answer 4

Maturity value

Question 5

What is the formula for the original issue discount?

Answer 5

Face value - sales price

Question 6

What are the two types of bonds ?

Answer 6

1. Baerer bond

2. Registered bond

Question 7

What is a baerer bond ?

Answer 7

The one who holds them owns them.

Question 8

What is a registered bond?

Answer 8

Belongs to the registered owner.

Question 9

What are the 4 types of public debt ?

Answer 9

1. Notes
2. Debentures
3. Mortgage bonds
4. Asset based bonds

Question 10

What are the two types of unsecured public debt and what are their terms?

Answer 10

1. Note, < 10 year

2. Debenture, > our = 10 years

Question 11

What are the two types of secured public debt?

Answer 11

1. Mortgage bonds

2. Asset based bonds

Question 12

What are the 4 types of bonds? Give the currency, the place where is is issued and the market it is exchanged on.

Answer 12

1. Domestic / Local / domestically / foreign
2. Foreign / Local / Locally by foreign company / Local
3. Eurobonds / Not in the currency of the country where it was issued
4. Global bonds : Sold in many countries simultaneously, each in its own currency

Question 13

What are the two types of private debt?

Answer 13

1. Term loan

2. Private placement

Question 14

What is the difference between term loans and private placement?

Answer 14

Term loans are loans made by banks, a private placement is a loan made by a small group of investors.

Question 15

What is a revolving line of credit?

Answer 15

Term loan that allows a company to borrow up to a specified limit for a specific time.

Question 16

What is a sovereign debt?

Answer 16

Debt issued by the national government.

Question 17

What are the 4 types of securities issued by the US government? Give their term and the frequence of coupons.

Answer 17

Treasury bills : no coupons / < 1 year
Treasury notes : semi-annual coupons / (1 , 10] years
Treasury bonds : semi-annual coupons / > 10 years
Treasury-inflation-protected-securities (TIPS) : semi annual coupons, variable terms

Question 18

What is a TIPS?

Answer 18

Fixed coupon rate, but principal is adjusted with inflation

Question 19

How are treasury securities sold?

Answer 19

Auction

Question 20

What is a STRIP?

Answer 20

Treasury notes or bonds with coupons stripped sold on the secondary market. (Effectively zero coupon bonds)

Question 21

Where are the treasury bonds taxable?

Answer 21

Federal level only.

Question 22

What is a municipal bond and where is it taxable?

Answer 22

Bonds issued by local governments, pays semi-annual coupons (fixed or floating). NOT taxable on the federal level and usually exempted from the income taxes of the local government.

Question 23

What is a floating coupon rate?

Answer 23

Depends on some reference rate of specific treasuries.

Question 24

What are the 4 types of municipal bonds?

Answer 24

1. General obligation bonds
2. Revenue bonds
3. Double-barreled bonds
4. Asset-based security

Question 25

What are the government sponsored enterprises offering mortgage based securities? Which one is explicitly guaranteed by the us government?

Answer 25

1. Ginnie Mae (GNMA) : guaranteed by US gov 2. Fannie Mae (FNMA) 3. Freddie Mac (FHMLC)

Question 26

The SLMA (Sallie Mae) securities are based on which asset?

Answer 26

Student loans

Question 27

What is the risk on mortgage based securities?

Answer 27

Pre-payment risk.