Instruments of borrowing and capital
To start a corporation its organizers (grunders, founders) should organize its financing. If they have enough money, they buy shares for their money, and the corporation begins to act. If your money is not enough, then the founders have a choice: to expand the circle of co-owners by selling shares and (or) borrow money from creditors. In both cases, the market offers securities. The main securities are bonds, preferred shares and ordinary shares.
Corporate bonds are a long-term obligation to pay the bearer a certain amount of money after a certain time, and also pay coupon interest payments on a certain schedule. All conditions are detailed in the agreement on borrowing, which is an integral part of the bond. In the US, these securities are most often issued with a nominal value of $ 1,000, and the coupon interest is paid each half or year.
Secured and unsecured bonds. A bond, behind which only the good name and prestige of the corporation that issued it, is called a debenture ( debenture ). Its buyer acquires the right to a part of the assets of the corporation, if it does not pay the promised in time. Often corporations stipulate holders of debentures the right to be in the forefront of the creditors' queue and, in this case, the debenture is called subordinated. Debenture is an example of an unsecured bond. Often, the rights of buyers of corporate bonds are guaranteed by certain assets of the corporation - shares, real estate, equipment, etc., the rights to implement them, if necessary, protect the interests of holders of these bonds are transferred to a special trust under an independent management from the corporation. In this case, the bond is called secured.
Bonds may be issued in series with different maturity periods or repayment periods. Many bond agreements stipulate that the corporation should deposit part of the debt to the trust from year to year in such a way that by the time of payments it will always have enough funds to pay off the bonds. This process is called a bond depreciation.
There are bearer shares and registered. Registered shares are in an intermediate position between them: they can be freely resold, but the name of the owner must be registered by the authorized agent of the issuing firm.
For a long time, more complex bonds have been circulating in the stock market:
- Firm bonds are issued in difficult times, coupons for them accumulate and begin to be paid when the firm, as a result of the reorganization, unwinds to the required level of profitability;
- convertible bonds can be converted into ordinary shares of the company or other securities at a certain price and under certain conditions at the option of the holder. At the moment of issue, the conversion price is higher than the current price. The market price may exceed the price of conversion. This can make it profitable to convert a bond into shares. In exchange for this attractive property, the issuing firm pays interest on convertible bonds is usually lower than for comparable non-convertible bonds;
- attached warrants increase the attractiveness of issuing bonds for the buyer, giving the holder of these bonds a guarantee of buying the company's ordinary shares for a certain period of time at a certain price. If the warrants are detachable ( detachable ), then they can be sold as a separate security. On the leading exchanges, warrants are included in the list of traded securities;
- recallable bonds (callable bonds) contain in their agreement on the issuance of (indenture) a reservation that the issue of bonds can be bought by the issuing company at a pre-fixed price to term maturity (maturity). The recall price (call price) is usually slightly higher than the nominal value. This property has most of the bonds, with the majority of holders being given an option (option) for converting their bonds into common shares between the recall date (call) and the maturity date ( retirement date).
Corporate bonding examples
1. The firm issues bonds that are not secured by specific assets. The release agreement stipulates that these bonds have the primary right to claim assets of the firm in the event of its liquidation. To which category is this bond to be attributed?
Reply. Subordinated Debenture.
2. A bond with a face value of 1000 rubles. can be converted into 30 ordinary shares at any time during the next eight years. The current price of shares is 28 rubles. a piece. If the bond is converted and shares are sold immediately, what will be the gain or loss (if you consider that the transaction costs will be equal to 20 rubles)?
Reply. The holder will receive for 30 shares but 28 rubles. = 840 rubles. After paying commissions for the sale of shares, he will receive 840 - - 20 = 820 rubles. and, therefore, will suffer a loss of 180 rubles. against the denomination of 1,000.
3. Let's look at example 2. At what price level does the holder of the bond lose and not win?
Answer. At a level where the cost of 30 shares is 1020 rubles. at the sale price of the stock in 1020/30 = 34 rubles.
4. The holder has a bond with a par value of 1,000 rubles, convertible into 50 shares of the company. Shares are sold for 25 rubles. Bonds are withdrawn at a price of 1050 rubles. When converting and selling shares, you will have to pay 25 rubles. commission. With consent to withdrawal, the commission holder does not pay. What alternative is more profitable for a bond holder?
Reply. Consent to the withdrawal will bring 1050 rubles. Conversion and sale will bring 50x. 25 - 25 = 1225 rubles. at 175 rubles. more.
5. The bond has an attached warrant, allowing the holder to buy up to 20 shares at a price of 10 rubles. per share. Shares are sold at a price of 15 rubles. To cash out a warrant you need to pay 20 rubles. commission. How much will a warrant cost if it is disconnected and sold?
Answer: With a warrant, an investor can save 5 rubles each. on each of the 20 shares, i. 100 rubles. The cost of a warrant without consideration of other factors will be approximately 100 - 20 = 80 rubles.
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