高级公司金融Long-Term Debt推荐.ppt

Discount rate for the bond consists of risk free rate and default risk premium. Management may know more about the The return of debt instruments consist of two components, risk free rate and risk premium The risk of debt depends on whether the debt holders can get the promised interest and the principal. Whether a firm will default? If it default how much debt holder will recover? Bond rating reflects a firm’s ability to repay debt not it’s operating performance. It determines the cost of debt if a firm issues bond in the market. Risk free rate is not purely risk free. It is just default risk free. It may also have interest rate risk. US treasury bond. Chinese government bond. Why firms pays for ratings: good firms want to differentiate themselves from bad firms to get low cost debt financing. Many firms have more than one ratings which means they pay more than one rating agencies for rating. Why? Standard Poor’s downgraded U.S. government rating. But Fitch maintains good rating. Independence of rating agency. Inflation are often related to interest rate. The effect of controlling inflation risk depends on monetary policy. In China, interest rate is not market determined. When inflation increases central bank may not necessarily adjust interest rate. (reserve rate, loan quato) Bondholders of zero-coupon bond pay capital gain tax while for interest investor need to pay income tax. Example: 1000, 10%, 5 year, 621 The benefit of coupon bond is equal to income bond. Income bond never default. Why not firms always issue income bond. Convertible bond is hybrid. Preferred stock. Puttable bond has nearly not covenants. 20.4 Bond Rating What is rated: The likelihood that the firm will default. The protection afforded by the loan contract in the event of default. Who pays for ratings: Firms pay to have their bonds rated. The ratings are constructed from the financial statements supplied by the firm. Ratings can change. Raters can disagree. Credit Rating Agency (CRA) Big