liabilities management
DESCRIPTION
course requirement for Management Advisory Services subject.TRANSCRIPT
Powerpoint Templates Page 1
“Risk comes from not knowing what
you’re doing.”
-Warren Buffet
Powerpoint Templates Page 2
LONG TERM FINANCING
Liabilities Management
Powerpoint Templates Page 3
Sources of Long-term Financing
Principal Sources of Funds
A. Debt Financing
Bonds
B. Equity Financing
Common Stock
Retained Earnings
C. Hybrid Financing
Preferred Stock
Lease
Convertible
Securities
Option
Warrant
Powerpoint Templates Page 4
Debt Financing
Debt
financing
takes the
form of loans
that must be
repaid over
time, usually
with interest.
Powerpoint Templates Page 6
Why Issue Bonds?
1. An alternative source of income
2. Leverage - borrowing can increase
shareholder returns
3. Less frequent payment - coupons are
typically paid every three, six or twelve
months, depending on the bond.
4. Delayed principal repayment
5. Fixed interest rate
6. Flexibility
Powerpoint Templates Page 7
Risk and Challenges
in Issuing Bonds 1. Financial Risk
2. Refinancing Risk
3. Large Bullet Payment
4. Administration Cost
5. Disclosure Requirements
Powerpoint Templates Page 8
Are Bonds Suitable For Your
Business? 1. Good Credit Quality
2. Relatively Large Size
3. Good Financial Records
4. Public Profile
5. Relatively Stable Earnings
6. Relatively Low Debt
7. Large Borrowing Requirements
Powerpoint Templates Page 9
How long must the term be?
The term of a bond depends on the reasons
for raising capital and the expected cash
flows that will be available to meet
payments.
Powerpoint Templates Page 10
MATURITY
Money Market
Securities
Capital Market Securities
Stocks (Equity) Notes and Bonds
0 1 year to 10 years to 30 years to No specified
maturity maturity maturity maturity
(Intermediate-term financing)
Powerpoint Templates Page 11
Primary and Secondary Market
Transfer of Funds Time Line
Primary Markets (Where new issues of financial instruments are offered for sale)
Users of Funds
(Corporations
issuing debt/equity
instruments)
Underwriting with
Investment Banks
Initial Suppliers of
Funds (Investors)
Financial Instruments flow
Funds Flow
Powerpoint Templates Page 12
Primary and Secondary Market
Transfer of Funds Time Line
Secondary Markets (Where financial instruments, once issued, are traded)
Financial Markets Securities Brokers Other Suppliers of
Funds
Financial Instruments flow
Funds Flow
Powerpoint Templates Page 13
Bonds (Debt Financing)
Basic Types of Bonds
1. Debenture Bonds
2. Mortgage Bonds
• Open-end
• Closed-end
3. Income Bonds
4. Serial Bonds
Powerpoint Templates Page 14
Bonds (Debt Financing)
Debenture bonds – not secured with tangible assets, only by the creditworthiness
Mortgage bonds - secured by a mortgage on one or more assets
Income bonds - pays interest at a rate based on the issuer's earnings
Serials bonds - a portion of the
outstanding bonds matures at regular
intervals
Default Risk Issue Date
Maturity Coupon Rate
Call Provisions Face Value
Powerpoint Templates Page 15
QUESTIONS
• Why do firms call/pay the bonds ahead of
schedule?
• What if the bond holder does not turn the
bonds in for redemption?
Powerpoint Templates Page 16
Market Price of Bonds
Bond
Stated
Interest
Rate
10%
7% Premium
10% Face Value
13% Discount
Yield
Powerpoint Templates Page 18
Bond Valuation Mathematics
Formula:
PV of Bond = PV of Principal + PV of Interest
Powerpoint Templates Page 19
1. 15-year bonds with 13%
annual rate
PV= PV of Principal + PV of
Interest
= 239.39 + 988.79
= 1,228.18
Amortization:
Year 1: 1228.18 x 10% = 122.82
1000.00 x 13% = 130.00
Given: $1000 par value bond, 15 years Coupon rate: 13% or 7% Effective Rate: 10%
Problem:
2. 15-year bonds with 7%
annual rate
PV= PV of Principal + PV of
Interest
= 239.39 + 532.43
= 771.82
Amortization:
Year 1: 771.82 x 10% = 77.18
1000.00 x 7% = 70.00
7.18 7.18
Powerpoint Templates Page 20
-
200.00
400.00
600.00
800.00
1,000.00
1,200.00
1,400.00
15 14 13 12 11 10 9 8 7 6 5 4 3 2 1 0
7%
10%
13%
Years Remaining until Maturity
Bond Value ($)
Powerpoint Templates Page 21
Volatility of Bonds
Bonds currently selling at a premium has the
least volatility
The most volatile bonds are the zero-interest
bonds because all interests are paid only at
maturity
The more time until the bond matures, the
greater the bond’s volatility
Bonds volatility is lower than stocks
Powerpoint Templates Page 22
Reality Check (Debt Financing)
• SMC raises $800M via overseas bond
issue, Philippine Daily Inquirer, April 19,
2013
• ALI to issue P21-B bonds, The Philippine
Star, June 20, 2013
• Globe Telecom to issue P10B worth of
bonds, June 28, 2013
Powerpoint Templates Page 23
“No matter how great the talent or
efforts, some things just take time. You
can’t produce a baby in one month by
getting nine women pregnant.”
-Warren Buffet