10. Long-Term Debt. Term Structure of Interest Rates. Leasing

Transcription

1 Corporae Finane [ ] 0. Long-er Deb. er Sruure of Ineres Raes. Leasing. Valuaion of Seuriies. Soures of Long-er Finaning here are hree ain reasons for he widespread use of long er deb:. Copared wih equiy, i is less osly beause of he ax deduibiliy of he ineres oss.. Deb provides finanial leverage, whih allows for a agnifiaion of profis (and losses). 3. Copared wih shor-er deb, long er deb offers greaer flexibiliy o he borrower in ha i allows uh longer periods for repayen... er loans er loans are borrowings on whih aouns of prinipal and ineres are regularly paid over he life of he loan. er loans are ypially used by saller opanies. er loans are privaely arranged. Copanies find privae plaeens desirable beause hey are far less osly han publi plaeens... onds Usually he er bond refers o long-er deb ha is seured by asses. Debenures, ofen alled debs are unseured bonds, no seured by asses. Seuriy refers o he reourse of he deb holder in he even of defaul. onds seured by a orgage are alled orgage bonds, and bonds seured by he opany s soks or bonds are ollaeral rus bonds.converible bonds (onvers) peri bondholders o hange (a heir opion) heir deb o equiy a erain prespeified pries.. ond feaures oupons he saed ineres payens ade on a bond. Also oupon aoun. fae value he prinipal aoun of a bond ha is repaid a he end of he er. Also par value or auriy value. oupon rae he annual oupon divided by he fae value of a bond. Also known as he proised rae. auriy Speified dae a whih he prinipal aoun of a bond is paid. onds aure in 7 o 30 years fro issue. yield o auriy he arke ineres rae ha equaes a bond s presen value of ineres payens and (Y) prinipal repayen wih is prie. Also inernal rae of reurn (IRR) on he bond. all provisions When a opany redees bonds before heir auriy, i is said o all he. os bonds oday are allable. pu bonds Soeies he holder ay redee bonds a par value a a speified ie before auriy. sinking fund Originally referred o an aual oney fund ha was se aside, invesed and hen used o reire bonds a auriy. resriive ovenans he indenure speifies resriive ovenans, whih are he ondiions under whih a opany us operae o ensure he bond s value over ie. raings Raings firs grade bonds on heir defaul risk. Raings range fro riple A o C or D.

2 Corporae Finane [ ].3 Valuaion of bonds Finanial insruens ofen have arke values, whih an be observed. In he sae ie hey have eonoi (fair, heoreial, inrinsi) values, whih an be alulaed using heoreial forula (odel), based on sound eonoi assupions. he differenes beween he arke value and he eonoi value reveal arbirage opporuniies. Wih he higher arke value han he fair value, a seuriy is assued o be overpried (overvalued) - you should sell i. Wih he lower he arke value han he fair value, a seuriy is underpried (undervalued) - you should buy i. Insead of deerining value, invesors ofen prie finanial insruens in ers of ineres raes (yields). Rae of ineres is jus rae of reurn for an invesor or in he sae ie os of apial for a borrower. he value of a bond or any finanial insruen equals he presen value of is expeed ash flow. he radiional or sandard ehnique is o use a single ineres rae, whih is he required rae of reurn on bond. () he following bond valuaion forula assues annual opounding.... or ( ( ( i ) [( ] i( ( Wih seiannual opounding he bond prie is equal o: y y ()... or y Wih oupons in a year a bond prie is equal o (3)... n n y y y y or n y - y (4) n y y he relaionship beween a bond s yield y wih -oupons and an effeive yield i (bond wih annual ash flows) is n n y ( and y ( -

3 Corporae Finane [ ] (5) hus he prie of a bond wih oupons is: Zero oupon bonds (6) n [( -] ( ( - ( n - he prie of a zero oupon bond is CF ( ( Yield o auriy (inernal rae of reurn) is: (7) Y Consol bonds A onsol bond never aures. I is a perpeuiy. here is no auriy. Noe, ha while auriy is infinie ), duraion is finie. (8) (9) CF ( i Wih seiannual opounding he onsol prie is equal o:.4 Y y Assupions: a) You hold he bond o auriy b) You reinves all he ineress a he Y rae. he fundaenal priniple in ineres bearing insruens (bonds as an exaple) prie behavior is ha when arke ineres raes rise, bond pries fall. Conversely, when arke ineres raes fall, bond pries rise. As an ineres bearing insruen espeially wih fixed oupon rae approahes is auriy dae, is value oe nearer o par value. Curren yield is opued as (0) () Japanese yield o auriy is opued as ( ) 3

4 Corporae Finane [ ]. Leasing. Lease onra Leasing represens finaning alernaive by whih firs raise a subsanial aoun of apial. Leasing an be viewed as a ype of deb hrough whih he fir is able o obain he use of physial asse, hough no is legal ownership. A lease is a onra in whih one pary grans o anoher pary he righ o use or oupy propery owned by he forer. he graning pary is he lessor; he pary using he propery is he lessee. For he lessee leasing represens alernaive o borrowing, bu i is fundaenally differen in one respe - he legal ownership of he asse. he lessee is no he owner of he asse.. Why do opanies lease asses?. A lease onra is anelable.. Lease onras ay inlude ainenane arrangeens. 3. A opany an lower is organizaional and adinisraive oss. 4. he lessor fir an borrow oney a a lower rae han he lessee fir an..3 ypes of Leases Operaing leases he prinipal haraerisis of operaing leases is ha he ainenane and servie of he leased equipen is provided by he lessor. A anellaion lause gives he lessee he righ o anel he lease agreeen before he expiraion of he lease er. Finanial Lease A finanial or apial lease is a nonanelable, longer-er lease ha fully aorizes he lessor s os for equipen. Servie and ainenane are usually provided by he lessee. Soe finanial leases provide for erain renewal or purhase opions a he end of he lease er. Sale and Leasebak he sale of an asse and siulaneous agreeen o lease i bak fro he purhaser. Dire Lease he lessor already owns or aquires he asse, whih is hen provided o he lessee. Ofen he lessor is a anufaurer or a leasing opany ha is providing he asse and is finaning o he lessee. Leveraged Leases A leveraged lease is a speial lease arrangeen under whih a lessor borrows a subsanial porion of he aquisiion os of he leased asse fro a hird pary. rue Lease Under a rue lease, he lessee is able o dedu he lease payens fully for ax purposes. he lessor ay reain he ax depreiaion deduions. 4

5 Corporae Finane [ ] he five IRS requireens for a rue lease are as follows:. he esiaed fair arke value of he leased asse a he expiraion of he lease us equal or exeed 0% of he asse s original os.. he esiaed reaining useful life of he leased asse beyond he er of he lease us equal or exeed 0% of he original esiaed useful life of he asse and us be a leas one year. 3. he lessee us no have he righ o purhase he asse fro he lessor a a prie less han he fair arke value. 4. he lessor us have a iniu a risk invesen equal o a leas 0% of he os of he leased asse. 5. he lessee us provide a reasonable reurn o he lessor, relaive o he reurn on loans..4 urhase or Lease o assess he ipa of eiher alernaive on fir value, a ne presen value (NV) analysis for leasing is required. he lease ash flows an be alulaed as: I 0 ( ) for 0 () LCF - (- ) D for > 0 where I is he os of he equipen/propery leased, is he lease payen D is he foregone (los) depreiaion in period is he fir s (lessee s) arginal ax rae. If NV is posiive, a fir should aep he lease finaning. IF NV is negaive, a fir should borrow an purhase he asse. he lessor s ash flows are analogous o hose of he lessee, bu wih a reversal sign. Of ourse, wih differen ax raes and oss of apial o he lessor and he lessee, boh an benefi. 5