This is an extract of our Introduction To Bonds document, which we sell as part of our Debt Finance Notes collection written by the top tier of Cambridge And Oxilp And College Of Law students.
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Introduction to Bonds???Eurobond market Bond = debt security, "IOU" for a specific term, repayable on the maturity date. Borrower = issuer issues (sells) bond certificate to; lender =
investor/bondholder for consideration - occasionally there will be a guarantor for the issuer Made at par value/principal amount stated on bond certificateIssuer pays interest (the coupon) annually or semi-annuallyOn maturity, borrower pays back par value to investor holdingthe bond. Can have bonds with no specified maturity date.Depending on the length of time to maturity, a bond will appear on the issuer's balance sheet under Non-current liabilities. If due within one year
= current liabilities. Marketability: highly-marketable = very liquid market. Generally unsecured, particularly eurobonds (investors rely on pari passu ranking (order of payment on insolvency) and negative pledge undertakings for protection) Issuer normally undertakes that all payments will be free of withholding tax (gross-up + redemption provisions if withholding tax becomes payable) Quoted eurobond exemption = no withholding taxAdvantages of bond finance
Greater number of investors & not limited to banks Large anddiverse pool of funds Minimumdenomination of bonds smaller than minimum syndicate loan participation
- increases number of potential investors. Better if largefinancing needs a. Lower financing costs Risk spread acrossinvestors Lower risk = lowerinterest Capital costs donot apply & bonds treated slightly more favourably for capital adequacy Bonds are readilytradeable b. More flexibility Choice ofcurrency/investor Less onerousDisadvantages of bond finance a. b.
Credit rating Need a goodcredit rating More publicity Far moredisclosure (not appropriate in acquisitions) More regulation Esp. listedeurobonds Higher initial transaction costs More parties,more documents and regulatory requirements Timing: longer to put in place More parties,documents and regs. NB. Significanttime savings if bond issued under a programme. Relationship with investors Unlikely tomaintain relationship - cf. loans. Waivers may be
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