FINE 451 Lecture Notes - Lecture 7: Fallen Angel, High-Yield Debt, Survival Analysis
20 Aug 2019
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Lecture 7: corporate bonds: companies issue bonds to raise cash to: invest in projects, pay off old debt, buy back equity, etc, corporate bonds: Bondholders are senior claimants: get paid before common and preferred equity holders. Different bonds have different levels of seniority: senior secured/unsecured, subordinated, junior, etc. Failure to pay bondholders represents a default (can lead to bankruptcy) Bond features, for example: different maturities, coupon payments, callable/putable, convenants: restrictions placed on companies: Ratios to be maintained, for example debt/ebitda or ebitda/interest: bonds can be collateralized or general obligation: Collateralized: in default, bondholder gets specific collateral. Non-investment grade junk bonds high yield . Investment grade high grade : bond safety and credit ratings: a number of factors affect the likelihood a company will meet its debt obligations. Can build models that relate the financial ratios to probability of default: default probability (or intensity, or hazard rate): probability of default for a certain time period conditional on no earlier default.
