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Chapter 15

5.1 Characteristics of long-term debt

Investor viewpoint Company viewpoint

Low risk, therefore low return Cheap, predictable, does not
acceptable dilute control

Inflexible, increases risk at high
No voting rights (no control)
levels of gearing, must be repaid

5.2 Other types of bonds

 Deep discount – issued at a discount to nominal value and redeemable at par
and above

 Zero coupon – like deep discount but no interest is paid whilst in issue

 Hybrids – convertibles

Give the bond holder the right to convert (if they choose at the time) the debt
into other securities, normally ordinary shares, at a future date.

– converted at either a pre-determined price or ratio

– conversion premium occurs if the market value of the convertible stock is
greater than the market value of the shares the stock can be converted
into

– floor value is the minimum market price of the note, calculated as the PV
of the future interest plus the PV of the cash redemption value

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