“Risk comes from not knowing what
you’re doing.”
-Warren Buffet

Powerpoint Templates

Page 1
Liabilities Management

LONG TERM FINANCING
Powerpoint Templates

Page 2
Sources of Long-term Financing
Principal Sources of Funds
A. Debt Financing
Bonds

B. Equity Financing
Common Stock
Ret...
Debt Financing
Debt
financing
takes the
form of loans
that must be
repaid over
time, usually
with interest.
Powerpoint Tem...
What are Bonds?

Powerpoint Templates

Page 5
Why Issue Bonds?
1. An alternative source of income
2. Leverage - borrowing can increase
shareholder returns
3. Less frequ...
Risk and Challenges
in Issuing Bonds
1.
2.
3.
4.
5.

Financial Risk
Refinancing Risk
Large Bullet Payment
Administration C...
Are Bonds Suitable For Your
Business?
1.
2.
3.
4.
5.
6.
7.

Good Credit Quality
Relatively Large Size
Good Financial Recor...
How long must the term be?
The term of a bond depends on the reasons
for raising capital and the expected cash
flows that ...
MATURITY
Money Market
Securities

Capital Market Securities
Notes and Bonds

Stocks (Equity)

(Intermediate-term financing...
Primary and Secondary Market
Transfer of Funds Time Line
Primary Markets
(Where new issues of financial instruments are of...
Primary and Secondary Market
Transfer of Funds Time Line
Secondary Markets
(Where financial instruments, once issued, are ...
Bonds
(Debt Financing)

Basic Types of Bonds
1. Debenture Bonds
2. Mortgage Bonds
• Open-end
• Closed-end

3. Income Bonds...
Bonds
Mortgage bonds Debenture bonds – not
secured
secured with tangible Financing) by a mortgage
(Debt
on one or more ass...
QUESTIONS
• Why do firms call/pay the bonds ahead of
schedule?
• What if the bond holder does not turn the
bonds in for re...
Market Price of Bonds
Yield

7%
Bond
Stated
Interest
Rate
10%

Premium

10%

Face Value

13%

Discount

Powerpoint Templat...
Discount
If
Effective Rate is
GREATer
Powerpoint Templates

Page 17
Bond Valuation Mathematics
Formula:
PV of Bond = PV of Principal + PV of Interest

Powerpoint Templates

Page 18
Problem:
Given: $1000 par value bond, 15 years
Coupon rate: 13% or 7%
Effective Rate: 10%
1. 15-year bonds with 13%
annual...
Bond Value ($)
1,400.00
1,200.00
1,000.00

800.00

7%
10%
13%

600.00
400.00
200.00
15 14 13 12 11 10 9

8

7 6 5 4 3 2 1 ...
Volatility of Bonds
 Bonds currently selling at a premium has the

least volatility
 The most volatile bonds are the zer...
Reality Check
(Debt Financing)

• SMC raises $800M via overseas bond
issue, Philippine Daily Inquirer, April 19,
2013

• A...
“No matter how great the talent or
efforts, some things just take time. You
can’t produce a baby in one month by
getting n...
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Liabilities management

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Liabilities management

  1. 1. “Risk comes from not knowing what you’re doing.” -Warren Buffet Powerpoint Templates Page 1
  2. 2. Liabilities Management LONG TERM FINANCING Powerpoint Templates Page 2
  3. 3. Sources of Long-term Financing Principal Sources of Funds A. Debt Financing Bonds B. Equity Financing Common Stock Retained Earnings C. Hybrid Financing  Preferred Stock Lease Convertible Securities Option Warrant Powerpoint Templates Page 3
  4. 4. Debt Financing Debt financing takes the form of loans that must be repaid over time, usually with interest. Powerpoint Templates Page 4
  5. 5. What are Bonds? Powerpoint Templates Page 5
  6. 6. Why Issue Bonds? 1. An alternative source of income 2. Leverage - borrowing can increase shareholder returns 3. Less frequent payment - coupons are typically paid every three, six or twelve months, depending on the bond. 4. Delayed principal repayment 5. Fixed interest rate 6. Flexibility Powerpoint Templates Page 6
  7. 7. Risk and Challenges in Issuing Bonds 1. 2. 3. 4. 5. Financial Risk Refinancing Risk Large Bullet Payment Administration Cost Disclosure Requirements Powerpoint Templates Page 7
  8. 8. Are Bonds Suitable For Your Business? 1. 2. 3. 4. 5. 6. 7. Good Credit Quality Relatively Large Size Good Financial Records Public Profile Relatively Stable Earnings Relatively Low Debt Large Borrowing Requirements Powerpoint Templates Page 8
  9. 9. How long must the term be? The term of a bond depends on the reasons for raising capital and the expected cash flows that will be available to meet payments. Powerpoint Templates Page 9
  10. 10. MATURITY Money Market Securities Capital Market Securities Notes and Bonds Stocks (Equity) (Intermediate-term financing) 0 1 year to 10 years to maturity maturity 30 years to maturity Powerpoint Templates No specified maturity Page 10
  11. 11. Primary and Secondary Market Transfer of Funds Time Line Primary Markets (Where new issues of financial instruments are offered for sale) Users of Funds (Corporations issuing debt/equity instruments) Underwriting with Investment Banks Initial Suppliers of Funds (Investors) Financial Instruments flow Funds Flow Powerpoint Templates Page 11
  12. 12. Primary and Secondary Market Transfer of Funds Time Line Secondary Markets (Where financial instruments, once issued, are traded) Financial Markets Securities Brokers Other Suppliers of Funds Financial Instruments flow Funds Flow Powerpoint Templates Page 12
  13. 13. Bonds (Debt Financing) Basic Types of Bonds 1. Debenture Bonds 2. Mortgage Bonds • Open-end • Closed-end 3. Income Bonds 4. Serial Bonds Powerpoint Templates Page 13
  14. 14. Bonds Mortgage bonds Debenture bonds – not secured secured with tangible Financing) by a mortgage (Debt on one or more assets assets, only by the creditworthiness Default Risk Maturity Call Provisions Issue Date Coupon Rate Face Value Serials bonds - a portion of the Income bonds - pays interest at a rate based outstanding bonds on the issuer's earnings matures at regular intervals Powerpoint Templates Page 14
  15. 15. QUESTIONS • Why do firms call/pay the bonds ahead of schedule? • What if the bond holder does not turn the bonds in for redemption? Powerpoint Templates Page 15
  16. 16. Market Price of Bonds Yield 7% Bond Stated Interest Rate 10% Premium 10% Face Value 13% Discount Powerpoint Templates Page 16
  17. 17. Discount If Effective Rate is GREATer Powerpoint Templates Page 17
  18. 18. Bond Valuation Mathematics Formula: PV of Bond = PV of Principal + PV of Interest Powerpoint Templates Page 18
  19. 19. Problem: Given: $1000 par value bond, 15 years Coupon rate: 13% or 7% Effective Rate: 10% 1. 15-year bonds with 13% annual rate 2. 15-year bonds with 7% annual rate PV= PV of Principal + PV of Interest = 239.39 + 988.79 = 1,228.18 Amortization: Year 1: 1228.18 x 10% = 122.82 1000.00 x 13% = 130.00 PV= PV of Principal + PV of Interest = 239.39 + 532.43 = 771.82 Amortization: Year 1: 771.82 x 10% = 77.18 1000.00 x 7% = 70.00 Powerpoint Templates 7.18 7.18 Page 19
  20. 20. Bond Value ($) 1,400.00 1,200.00 1,000.00 800.00 7% 10% 13% 600.00 400.00 200.00 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1 0 Years Remaining until Maturity Powerpoint Templates Page 20
  21. 21. Volatility of Bonds  Bonds currently selling at a premium has the least volatility  The most volatile bonds are the zero-interest bonds because all interests are paid only at maturity  The more time until the bond matures, the greater the bond’s volatility  Bonds volatility is lower than stocks Powerpoint Templates Page 21
  22. 22. Reality Check (Debt Financing) • SMC raises $800M via overseas bond issue, Philippine Daily Inquirer, April 19, 2013 • ALI to issue P21-B bonds, The Philippine Star, June 20, 2013 • Globe Telecom to issue P10B worth of bonds, June 28, 2013 Powerpoint Templates Page 22
  23. 23. “No matter how great the talent or efforts, some things just take time. You can’t produce a baby in one month by getting nine women pregnant.” -Warren Buffet Powerpoint Templates Page 23

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