AFM391 Chapter 14: AFM 391 - Chapter 14

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Characteristics: bond created by contract called bond indenture and represents promise to pay sum at maturity and periodic interest on face value, selling entire bond issue to investment banker via. Firm underwriting (buying entire bond and taking risk of selling for market) or best efforts underwriting (selling and taking commission: or can sell directly to private institution (private placement) Other options: callable bonds give issuer right to retire debt before maturity, convertible debt allows issuer to convert debt into securities. Occurs when the cost of early repayment penalties is too high, so one sets aside money in a trust and allows trust to repay original debt (interest + principal) on their behalf. Types of companies that have significant debt financing. 3 ways to finance: borrowing, issuing equity, and using internally generated funds (collecting receivables, delaying accounts payable) When the effective yield (market rate) = stated rate bond sells at par: dr. cash, cr.

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