©2012 McGraw-Hill Ryerson Limited 1 of 35 Learning Objectives 4.Outline some of the features of innovative forms of raising long-term financing, including zero-coupon rate bonds, floating rate bonds and real return bonds. (LO4) 5.Outline the characteristics of long-term lease financing that make it an alternative form of long-term financing. (LO5) 6.Analyze a lease-versus-borrow-to- purchase decision. (LO6)

©2012 McGraw-Hill Ryerson Limited 2 of 35 Innovative Forms of Bond Financing Zero-Coupon Bond / Strip Bond: –does not pay coupon (interest) –is issued at a deep discount from face value –zero-coupon bond was created when coupons stripped from a coupon bond and were traded separately from the face value Floating Rate Bond: –Interest/coupon rate paid on the bond changes with market conditions Real Return Bond –principal adjusted for inflation Revenue Bond –security based upon cash flow Eurobond: –bond issued in a country other than the one in which currency the bond is denominated LO4

©2012 McGraw-Hill Ryerson Limited 3 of 35 Corporate Debt for the Medium Term Term Loans –a loan advanced against capital asset security –the length of time is 3 to 10 years –principal and interest payments are monthly or quarterly with a balloon payment of principal at the end of the term Operating Loans –Generally advanced based on current asset security –Payable on demand Medium Term Notes (MTNs) –of 3 to maybe 10 years duration LO4

©2012 McGraw-Hill Ryerson Limited 4 of 35 Corporate Debt for the Medium Term Mortgage Financing –a loan advanced against property –Formal appraisal of the property required –Terms of 6 months to 10 years Asset-Backed Securities –Current assets sold into a trust –Firm gets immediate capital in exchange for its assets –Investor receives a steady return as the receivables are collected LO4

©2012 McGraw-Hill Ryerson Limited 5 of 35 Advantages and Disadvantages of Debt Advantages: – interest payments are tax deductible to a firm – wise use of debt may lower a firm’s weighted average cost of capital (WACC) – during inflation, debt is repaid with “cheaper dollars” Disadvantages: – interest and principal must always be met when due, regardless of a firm’s financial position – poor use of debt may lower a firm’s stock price – may place burdensome restrictions on the firm LO4