Introduction to Corporate Finance

PART 4: CAPITAL STRUCTURE AND PAYOUT POLICY

In some transport cases, such as tunnels and bridges, a government will invite, by tender, a private

company to build the project and operate it for many years, then hand it back to the government for

operation. The company would borrow the funds to build the project, then charge users for access to

the transport link while operating it. This sort of project is called a Build–own–operate–transfer (BOOT)

project. The funding arrangements for the company are usually channelled through a vehicle company,

and the borrowing by this company is non-recourse.

4 Suppose that a specialty retail company takes out a term loan from a bank. Which do you think the

bank would prefer to receive as collateral: a claim on the company’s inventory or on its receivables?

5 A problem with collateral is that its value is positively correlated with the borrower’s ability to repay.

Explain.

6 What aspect of syndicated lending is most attractive to the lenders?

7 Why are syndicated loans especially useful for financing takeovers?

8 How do project finance (PF) loans differ from other types of syndicated loans?

CONCEPT REVIEW QUESTIONS 14-2

14 -3 CORPORATE BONDS

A corporate bond is a debt instrument that allows a corporation to borrow money from institutions or

individuals and promises to repay it in the future under clearly defined terms. Companies issue bonds

with maturities of one to more than three years (debt securities with an original maturity of one to 10

years are called notes). In Australia, the face value (par value) is usually $100 for corporate bonds. In

the international markets, the face value may more likely be $1,000. The coupon interest rate on a bond

represents the percentage of the bond’s face value that the company will pay to investors each year. In

Australia, companies typically pay interest quarterly in four equal coupon payments. Bondholders receive

the face value back when the bonds mature.

14 -3a POPULAR TYPES OF BONDS

Bonds can be classified in a variety of ways. Here, we break them into traditional bonds, the basic types

that have been around for years, and new, innovative bonds. Table 14.1 summarises the traditional types

of bonds issued by corporations in terms of their key characteristics and priority of lender’s claim in the

event of default. In Australia, corporate bonds represent a broad class of borrowing by a company. A

special type of corporate bond is a debenture, which is a corporate bond usually secured against property.

Corporate bonds secured against other assets such as loans are known as secured bonds.

What types of long-term debt

might be used by a mature

company compared with one

that is recently started?

thinking cap
question

LO 14.3