Debt
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Financial Terms Related to Debt

Financial Terms Related to Debt

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Debt Document Transcript

  • 1. Financial Terms related to Debt This document is part of the valuable contents available at www.ftpall.com, a free onlineglossary with more than five thousand financial and business terms. This document can be copied and distributed freely Find thousands of financial terms at www.ftpall.com respecting its original format. It is forbidden its transcription, translation or change on its format without authorization of its author or editor.DEBTAbility to service debts • The ability of a firm to make the contractual payments required on a scheduled basis over the life of a debt.Cost of debt • Denotes the interest rate paid to bondholders. In the context of valuing firms, if the capital is debt, the cost of capital is called the cost of debt (synonymous with "yield").Cost of long term debt • The after tax cost today of raising long-term funds through borrowing.Debt • Refers to a relationship which obligates a borrower to pay interest and principal. The terms are often in writing and define the relationship. Indentures and mortgage notes are common types of these written instruments of indebtedness.
  • 2. www.ftpall.com 2|Page • Debt is a higher priority claim (in liquidation) compared to equity. These payments must be made, otherwise the firm will be subject to court-ordered bankruptcy or liquidation. It is also called leverage. • Money borrowed.Debt capacity • Ability to borrow. The amount a firm can borrow up to the point where the firm value no longer increases. Find thousands of financial terms at www.ftpall.comDebt capital • All long-term borrowing incurred by the firm.Debt covenants • Debt covenants spell out the details of the debt contract. For instance, the level and the timing of the promised interest rate and principal payments are explicitly stated. The covenants restrict the ability of the borrower to increase the risk of the firm after debt is taken on, or drain the assets of the firm. They are also designed to provide early warning signals if the health of the firm begins to weaken.Debt displacement • The amount of borrowing that leasing displaces. Firms that do a lot of leasing will be forced to cut back on borrowing.Debt due • The sum of bank and other notes payable in 12 months or less, and the portion of long term debt payable within a year.Debt equity ratio • Measures the ratio of long-term debt to common equity.Debt financing • Raising money for working capital or for capital expenditures by selling bonds, bills,
  • 3. www.ftpall.com 3|Page or notes to individual or institutional investors. In return for the money lent, the individuals or institutions become creditors and receive a promise to repay principal and interest on the debt. The other major way of raising capital is to issue shares of stock in a public offering. See also: Equity Financing.Debt instrument • An asset requiring fixed dollar payments, such as a government or corporate bond.Debt leverage Find thousands of financial terms at www.ftpall.com • The amplification in the return earned on equity funds when an investment is financed partly with borrowed money. • The amplification of the return earned on equity when an investment or firm is financed partially with borrowed money.Debt limit • Is the maximum amount of debt which a municipality may issue or incur.Debt limitation • A bond covenant that restricts in some way the firms ability to incur additional indebtedness.Debt market • The market for trading debt instruments.Debt ratio • Total debt divided by total assets. • Measures the proportion of total assets financed by the firms creditors.Debt relief • Reducing the principal and/or interest payments on LDC loans.Debt securities
  • 4. www.ftpall.com 4|Page • IOUs created through loan-type transactions commercial paper, bank CDs, bills, bonds, and other instruments. • IOUs created through loan-type transactions - commercial paper, bank CDs, bills, bonds, and other instruments.Debt security • A security representing a loan by an investor to an issuer such as a corporation, municipality, the federal government, or a federal agency. In return for the loan, the issuer promises to repay the debt on a specified date and to pay interest. Find thousands of financial terms at www.ftpall.comDebt service • Refers to the yearly obligation of interest and principal payable on a bond issue. Sometimes, the term is used collectively to refer to all debts outstanding. • The repayment of Interest and Principal of debt. • Interest payment plus repayments of principal to creditors, that is, retirement of debt.Debt service coverage ratio • Earnings before interest and income taxes plus one-third rental charges, divided by interest expense plus one-third rental charges plus the quantity of principal repayments divided by one minus the tax rate.Debt service parity approach • An analysis wherein the alternatives under consideration will provide the firm with the exact same schedule of after-tax debt payments (including both interest and principal).Debt swap • A set of transactions (also called a debt-equity swap) in which a firm buys a countrys dollar bank debt at a discount and swaps this debt with the central bank for
  • 5. www.ftpall.com 5|Page local currency that it can use to acquire local equity.Debt to capital ratio • The ratio of total debt to total capital ([short + long term debt] / capital). For long- term investors, a suggested acceptable percentage is up to 33%. Debt must be funded in good times and bad, so a company going through a bad slump has a better chance of recovering if its debt load is not too high. Keep in mind that debt serves the useful function of helping the company grow. It is up to management to use it wisely and increase the sales and earnings. Find thousands of financial terms at www.ftpall.comDebt to equity ratio • Refers to the capitalization relationship of securities. Here, it is the amount of bonds and preferred stocks relative to the corporate equity position. • The ratio identifies the relationship of debt to ownership interest in the firms financial structure. A measure of a companys financial leverage, calculated by dividing Long Term Debt by Shareholders Equity. A higher debt/equity ratio generally means that a company has been aggressive in financing its growth with debt, which can result in volatile earnings as a result of the additional interest expense.Debt/equity ratio • Indicator of financial leverage. Compares assets provided by creditors to assets provided by shareholders. Determined by dividing long-term debt by common stockholder equity.Debtor in possession • A firm that is continuing to operate under Chapter 11 bankruptcy process.Debtor in possession financing • New debt obtained by a firm during the Chapter 11 bankruptcy process.
  • 6. www.ftpall.com 6|PageDegree of indebtedness • Measures amount of debt relative to other significant balance sheet amounts.Firms net value of debt • Total firm value minus total firm debt.Funded debt • Debt maturing after more than one year.Interest rate on debt Find thousands of financial terms at www.ftpall.com • The firms cost of debt capital.Junior debt subordinate debt • Debt whose holders have a claim on the firms assets only after senior debt holders claims have been satisfied. Subordinated debt.Long term debt • A contractual liability between the two parties, the borrower (issuer) and the lender (saver). Examples include bonds and debentures. • An obligation having a maturity of more than one year from the date it was issued. Also called funded debt. • Often companies need more funds to support their activities than their profits can provide. Therefore they will borrow money and make interest payments regularly. Long-term debt describes the debt amount due after one year or more.Long term debt ratio • The ratio of long-term debt to total capitalization.Long term debt to capitalization • A ratio that indicates a companys financial leverage. It is calculated by dividing long term debt by the capital available to the company. The available capital is the
  • 7. www.ftpall.com 7|Page sum of long term debt, preferred stock and stocholders equity.Long term debt to equity ratio • A capitalization ratio comparing long-term debt to shareholders equity.Long term debt/capitalization • Indicator of financial leverage. Shows long-term debt as a proportion of the capital available. Determined by dividing long-term debt by the sum of long-term debt, preferred stock and common stockholder equity. Find thousands of financial terms at www.ftpall.comOriginal issue discount debt oid debt • Debt that is initially offered at a price below par.Secured debt • Debt that, in the event of default, has first claim on specified assets.Senior debt • Debt that, in the event of bankruptcy, must be repaid before subordinated debt receives any payment.Short term debt • All debt due in the next 12 months. This figure is found on the Balance Sheet under current liabilities. See also: Long-Term Debt.Standard debt provisions • Provisions in long-term debt agreements specifying certain criteria of satisfactory record keeping and reporting, tax payment, and general business maintenance on the part of the borrowing firm; normally, they do not place a burden on the financially sound business.Structured debt • Debt that has been customized for the buyer, often by incorporating unusual
  • 8. www.ftpall.com 8|Page options.Subordinated debt • Debt over which senior debt takes priority. In the event of bankruptcy, subordinated debt holders receive payment only after senior debt claims are paid in full.Total debt • Companies may have debt due within one year, as well as long-term debt payable over a longer period of time. The total debt figure includes both kinds of debt. Debt Find thousands of financial terms at www.ftpall.com can consist of bonds, debentures, or shorter term bank debt. Bondholders differ from stockholders in that they are lenders. They must receive their interest payments and when their bond comes due, and they will get their principal back.Total debt to equity ratio • A capitalization ratio comparing current liabilities plus long-term debt to shareholders equity.Total debt to total assets • Calculated by adding Short-Term and Long-Term Debt, then dividing by a companys Total Assets. Used to measure a companys financial risk, determining how much of the companys assets have been financed by debt.Trade debt • Accounts payable.Unfunded debt • Debt maturing within one year (short-term debt). See: funded debt.Unsecured debt • Debt that does not identify specific assets that can be taken over by the debt holder in case of default.