26354 L3 Longterm Finance I update.pptxVIP

Long-term Finance (I): Debt Instruments;Financing patterns Debt Instrument features and types bond and bond valuation bond duration and price sensitivity Other issues related to debt finance ;3;4;5;Debt and equity liabilities of non-financial corporations;Debt and equity liabilities of non-financial corporations;The patterns of debt and equity liabilities are converging among these countries USUK: The importance of equity is comparable in these two countries; debt especially loan seems to have gained market share after 2002 Japan: Equity was less important historically compared to loan. But that is changing after 2002; US has the most developed debt security market; and the share of the debt securities is relatively flat in each country.;9;10;11;12;13;Market debt: Debenture (bond);15;Coupon rate: Annual interest payment as a percentage of face value. It is fixed Yield to Maturity (YTM) The interest rate for which the PV of the bond cash flows (coupon + face value) equals the bond price. The rate of return you will earn if you buy the bond toady and hold it to maturity It fluctuates with the market price of the bond;;Market debt: Debenture (bond);20;21;22;Bond Rating;25;26;27;28;29;;;Sample Treasury Bond Quotes for 15 Feb 2008;33;34;35;36;37;year;;Interest rate risk Refers to the fact that bond prices fluctuate as interest rate (required rate of return) changes Bond prices rise if the market interest rate falls A change in interest rate has a greater effect on the prices of long-term bonds than on the prices of short-term bonds;;42;43;44;45;46;47;48;49