Nature of different bond
Chapter Case of chapter 6
1. The security of the bond, that is, whether the bond has collateral.
Effect on the coupon rate of the bond issue: Bond’s with collateral will have lower coupon rate as bondholders have claim on collateral no matter what.
Advantage: It provides an asset which lower default risk.
Disadvantage: Companies cannot sell this collateral as an asset and need to maintain it.
2. The seniority of the bond
Effect on the coupon rate of the bond issue: The more senior the bond, the lower the coupon rate. Senior notes have a lower coupon rate because they have less “default risk”. If the company defaults, they are more likely to recover assets so the senior notes get discounted slightly. The junior notes would likely get not as much so they have a higher risk and pay a higher rate.
Advantages: If an official creditor holds a bond that has a seniority or preferred creditor status, this creditor will get repaid on its loan first before other bond nonofficial holders in case the company would be unable to pay back its debt. Seniority makes it less risky for the companies to extend loans to countries that require aid, and thus it becomes politically easier to implement such actions.
Disadvantages: If official institutions provide financial assistance to a country in need, the other investors that hold bonds of the respective country run a larger risk of repayment. The country must first repay the larger loans to the official creditors before the private bond holders get repaid.
3. The presence of a sinking fund
Effect on the coupon rate of the bond issue: A sinking fund reduces coupon rate because it provides a kind of future guarantee to bondholders. The company must make payments into the sinking fund or default so it must have positive cash flow.
Advantages: For the organization retiring debt, it has the benefit that the principal of the debt or at least part of it, will be available when due. For creditors, sinking fund reduces
1. The security of the bond, that is, whether the bond has collateral.
Effect on the coupon rate of the bond issue: Bond’s with collateral will have lower coupon rate as bondholders have claim on collateral no matter what.
Advantage: It provides an asset which lower default risk.
Disadvantage: Companies cannot sell this collateral as an asset and need to maintain it.
2. The seniority of the bond
Effect on the coupon rate of the bond issue: The more senior the bond, the lower the coupon rate. Senior notes have a lower coupon rate because they have less “default risk”. If the company defaults, they are more likely to recover assets so the senior notes get discounted slightly. The junior notes would likely get not as much so they have a higher risk and pay a higher rate.
Advantages: If an official creditor holds a bond that has a seniority or preferred creditor status, this creditor will get repaid on its loan first before other bond nonofficial holders in case the company would be unable to pay back its debt. Seniority makes it less risky for the companies to extend loans to countries that require aid, and thus it becomes politically easier to implement such actions.
Disadvantages: If official institutions provide financial assistance to a country in need, the other investors that hold bonds of the respective country run a larger risk of repayment. The country must first repay the larger loans to the official creditors before the private bond holders get repaid.
3. The presence of a sinking fund
Effect on the coupon rate of the bond issue: A sinking fund reduces coupon rate because it provides a kind of future guarantee to bondholders. The company must make payments into the sinking fund or default so it must have positive cash flow.
Advantages: For the organization retiring debt, it has the benefit that the principal of the debt or at least part of it, will be available when due. For creditors, sinking fund reduces