1. FIN 614: Financial Management Larry Schrenk, Instructor

2. 1.Term Structure of Interest Rates 2.Junk Bonds 3.Bankruptcy

3. Term Structure of Interest Rates Yield Curve Long Term vs. Short Term Treasury Securities (Usually)

4. NOTE: Annual Returns on Bonds (not HPR) versus Maturities (not Time)

5. Yield Curve Shapes: Upward  Normal Yield Curve Downward  ‘Inverted’ Yield Curve Yield Curve Shape Theories: Pure Expectations Hypothesis Premia: Liquidity (LP), Maturity (MRP), Default (DRP)

6. Yield Curve Shape a Function of Future Interest Rates Expected Inflation Increase Expected  LT > ST LT Rates Average of ST Rates Implied Future Rates

7. What are Junk Bonds? ‘High Yield’ Bonds Versus ‘Fallen Angels’ Compare with IPO’s Michael Milken and Drexel Burnham Lambert Leveraged Buyouts

8. Agencies Standard & Poor's Moody's Fitch Ratings Distinction Investment Grade Bonds Junk Bonds

9. Standard & Poor's System Investment Grade AAA : the best quality companies, reliable and stable AA : quality companies, a bit higher risk than AAA A : economic situation can affect finance BBB : medium class companies, which are satisfactory at the moment Non-Investment Grade BB : more prone to changes in the economy B : financial situation varies noticeably CCC : currently vulnerable and dependent on favorable economic conditions to meet its commitments CC : highly vulnerable, very speculative bonds C : highly vulnerable, perhaps in bankruptcy or in arrears but still continuing to pay out on obligations CI : past due on interest R : under regulatory supervision due to its financial situation SD : has selectively defaulted on some obligations D : has defaulted on obligations and S&P believes that it will generally default on most or all obligations NR : not rated

10. Bankruptcy Cannot Pay Creditors Formal Legal Proceeding Transfer of Ownership Financial Distress

11. Direct Costs Legal and Administrative Costs Indirect Costs Impaired Ability to Conduct Business Agency Costs

12. Liquidation Chapter 7 (Federal Bankruptcy Reform Act of 1978) Assets Sold, Proceedings Distributed Absolute Priority Rule (APR) ‘Strategic’ Bankruptcy Reorganization Chapter 11 (Federal Bankruptcy Reform Act of 1978) Restructuring with provision to repay creditors

13. FIN 614: Financial Management Larry Schrenk, Instructor