Microsoft PowerPoint - PoF.ppt

Equity vs. debt instrumentsƒ 99

Equity instruments

ƒ

Residual claim (on the earnings of the firm)

ƒ

Control in non-default states (equity > 0)

ƒ

Dividend * (1-corporate tax rate)

ƒ

Debt instruments

ƒ

Contracted claim

Ä

“fixed income securities”

ƒ

Control in default states (equity < 0)

ƒ

Tax deductibility of interest

Multi-period deterministic cash flows: FI securities - Introduction