Principles of Corporate Finance_ 12th Edition

Chapter 24 The Many Different Kinds of Debt 643

bre44380_ch24_618-651.indd 643 10/05/15 12:54 PM

A useful general work on debt securities is:

F. J. Fabozzi (ed.), The Handbook of Fixed Income Securities, 8th ed. (New York: McGraw-Hill, 2011).

For nontechnical discussions of the pricing of convertible bonds and the reasons for their use, see:

M. J. Brennan and E. S. Schwartz, “The Case for Convertibles,” Journal of Applied Corporate Finance
1 (Summer 1988), pp. 55–64.

C. M. Lewis, R. J. Rogalski, and J. K. Seward, “Understanding the Design of Convertible Debt,”
Journal of Applied Corporate Finance 11 (Spring 1998), pp. 45–53.

Discussions of project finance include:

B. C. Esty, Modern Project Finance: A Casebook (NewYork: John Wiley, 2003).

B. C. Esty, “Returns on Project-Financed Investments: Evolution and Managerial Implications,”
Journal of Applied Corporate Finance 15 (Spring 2002), pp. 71–86.

R. A. Brealey, I. A. Cooper, and M. Habib, “Using Project Finance to Fund Infrastructure Invest-
ments,” Journal of Applied Corporate Finance 9 (Fall 1996), pp. 25–38.

The readings listed at the end of Chapter 17 include several articles on financial innovation.

● ● ● ● ●

FURTHER

READING

Select problems are available in McGraw-Hill’s Connect.

Please see the preface for more information.

BASIC

1. Debt types Select the most appropriate term from within the parentheses:

a. (High-grade utility bonds/Low-grade industrial bonds) generally have only light sinking-
fund requirements.

b. Collateral trust bonds are often issued by (utilities/industrial holding companies).

c. (Utility bonds/Industrial bonds) are usually unsecured.

d. Equipment trust certificates are usually issued by (railroads/financial companies).

e. Mortgage pass-through certificates are an example of (an asset-backed security/project
f ina nce).

2. Sinking funds For each of the following sinking funds, state whether the fund increases or
   decreases the value of the bond at the time of issue (or whether it is impossible to say):

a. An optional sinking fund operating by drawings at par.

b. A mandatory sinking fund operating by drawings at par or by purchases in the market.

c. A mandatory sinking fund operating by drawings at par.

3. Seniority

a. As a senior bondholder, would you like the company to issue more junior debt to finance
its investment program, would you prefer it not to do so, or would you not care?

b. You hold debt secured on the company’s existing property. Would you like the company to
issue more unsecured debt to finance its investments, would you prefer it not to do so, or
would you not care?

4. Bond contracts Use Table 24.1 (but not the text) to answer the following questions:

a. Who are the principal underwriters for the J.C. Penney bond issue?

b. Who is the trustee for the issue?

c. How many dollars does the company receive for each debenture after deduction of the
underwriters’ spread?

● ● ● ● ●

PROBLEM

SETS