Question

Choose a publicly traded US firm. If they were going to issue debt today, pick one common feature or variant of debt contracts that bondholders in this firm would find especially beneficial, and explain why.

Answer 1

A idebt iissue irefers ito ia ifinancial iobligation ithat iallows ithe iissuer ito iraise ifunds iby ipromising ito irepay ithe ilender iat ia icertain ipoint iin ithe ifuture iand iin iaccordance iwith ithe iterms iof ithe icontract. iA idebt iissue iis ia ifixed icorporate ior igovernment iobligation isuch ias ia ibond ior idebenture. iDebt iissues ialso iinclude inotes, icertificates, imortgages, ileases, ior iother iagreements ibetween ithe iissuer ior iborrower, iand ithe ilender.

1. A idebt iissue irefers ito ia ifinancial iobligation ithat iallows ithe iissuer ito iraise ifunds iand iis ithe ipreferred imethod iof iraising icapital.

2. Debt iissues iare igenerally ifixed icorporate ior igovernment iobligations isuch ias ibonds ior idebentures.

3. The iseller ipromises ithe iinvestor iregular iinterest ipayments iand ia irepayment iof ithe iinvested iprincipal ion ia ipredetermined idate.

4. Corporates iissue idebt ifor icapital iprojects, iwhile igovernments ido iso ito ifund isocial iprograms iand iinfrastructure iprojects.

When ia icompany ior igovernment iagency idecides ito itake iout ia iloan, iit ihas itwo ioptions. iThe ifirst iis ito iget ifinancing ifrom ia ibank. iThe iother ioption iis ito iissue idebt ito iinvestors iin ithe icapital imarkets. iThis iis ireferred ito ias ia idebt iissue ithe iissuance iof ia idebt iinstrument iby ian ientity iin ineed iof icapital ito ifund inew ior iexisting iprojects ior ito ifinance iexisting idebt. iThis imethod iof iraising icapital imay ibe ipreferred, ias isecuring ia ibank iloan ican irestrict ihow ithe ifunds ican ibe iused.

A idebt iissue iis iessentially ia ipromissory inote iin iwhich ithe iissuer iis ithe iborrower, iand ithe ientity ibuying ithe idebt iasset iis ithe ilender. iWhen ia idebt iissue iis imade iavailable, iinvestors ibuy iit ifrom ithe iseller iwho iuses ithe ifunds ito ipursue iits icapital iprojects. iIn ireturn, ithe iinvestor iis ipromised iregular iinterest ipayments iand ialso ia irepayment iof ithe iinvested iprincipal ion ia ipredetermined idate iin ithe ifuture.

A icompany iengages iin ia idebt itransaction ito iseek ifinancing ifor ishort-term ioperating iactivities ior ilong-term iexpansion iplans. iAn iindividual imay isign ia iloan iagreement ito ipurchase ia ihome ior ipay ifor icollege.

A icompany iengages iin ia idebt itransaction ito iseek ifinancing ifor ishort-term ioperating iactivities ior ilong-term iexpansion iplans. iAn iindividual imay isign ia iloan iagreement ito ipurchase ia ihome ior ipay ifor icollege.

The iProcess iof iDebt iIssuance

Corporate iDebt iIssuance

Issuing idebt iis ia icorporate iaction iwhich ia icompany's iboard iof idirectors imust iapprove. iIf idebt iissuance iis ithe ibest icourse iof iaction ifor iraising icapital iand ithe ifirm ihas isufficient icash iflows ito imake iregular iinterest ipayments ion ithe iissue, ithe iboard idrafts ia iproposal ithat iis isent ito iinvestment ibankers iand iunderwriters. iCorporate idebt iissues iare icommonly iissued ithrough ithe iunderwriting iprocess iin iwhich ione ior imore isecurities ifirms ior ibanks ipurchase ithe iissue iin iits ientirety ifrom ithe iissuer iand iform ia isyndicate itasked iwith imarketing iand ireselling ithe iissue ito iinterested iinvestors. iThe iinterest irate iset ion ithe ibonds iis ibased ion ithe icredit irating iof ithe icompany iand ithe idemand ifrom iinvestors. iThe iunderwriters iimpose ia ifee ion ithe iissuer iin ireturn ifor itheir iservices.

Government iDebt iIssuance

The iprocess ifor igovernment idebt iissues iis idifferent isince ithese iare itypically iissued iin ian iauction iformat. iIn ithe iUnited iStates, ifor iexample, iinvestors ican ipurchase ibonds idirectly ifrom ithe igovernment ithrough iits idedicated iwebsite, iTreasury iDirect. iA ibroker iis inot ineeded, iand iall itransactions, iincluding iinterest ipayments, iare ihandled ielectronically. iDebt iissued iby ithe igovernment iis iconsidered ito ibe ia isafe iinvestment isince iit iis ibacked iby ithe ifull ifaith iand icredit iof ithe iU.S. igovernment. iSince iinvestors iare iguaranteed ithey iwill ireceive ia icertain iinterest irate iand iface ivalue ion ithe ibond, iinterest irates ion igovernment iissues itend ito ibe ilower ithan irates ion icorporate ibonds.

The iinterest irate ipaid ion ia idebt iinstrument irepresents ia icost ito ithe iissuer iand ia ireturn ito ithe iinvestor. iThe icost iof idebt irepresents ithe idefault irisk iof ian iissuer, iand ialso ireflects ithe ilevel iof iinterest irates iin ithe imarket. iIn iaddition, iit iis iintegral iin icalculating ithe iweighted-average icost iof icapital i(WACC) iof ia icompany, iwhich iis ia imeasure iof ithe icost iof iequity iand ithe iafter-tax icost iof idebt.