1 / 13

Video 22 (Topic 4.4): Term Structure, Junk Bonds, and Bankruptcy

Video 22 (Topic 4.4): Term Structure, Junk Bonds, and Bankruptcy. FIN 614: Financial Management Larry Schrenk, Instructor. Topics. Term Structure of Interest Rates Junk Bonds Bankruptcy. Term Structure of Interest Rates. Term Structure of Interest Rates Yield Curve

lowri
Download Presentation

Video 22 (Topic 4.4): Term Structure, Junk Bonds, and Bankruptcy

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Video 22 (Topic 4.4):Term Structure, Junk Bonds, and Bankruptcy FIN 614: Financial Management Larry Schrenk, Instructor

  2. Topics • Term Structure of Interest Rates • Junk Bonds • Bankruptcy

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

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

  5. Yield Curve • 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. Pure Expectations Hypothesis • 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. Junk Bonds • What are Junk Bonds? • ‘High Yield’ Bonds • Versus ‘Fallen Angels’ • Compare with IPO’s • Michael Milken and Drexel Burnham Lambert • Leveraged Buyouts

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

  9. Bond Ratings • 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 vs. Financial Distress • Bankruptcy • Cannot Pay Creditors • Formal Legal Proceeding • Transfer of Ownership • Financial Distress

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

  12. Bankruptcy Process • 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. Video 22 (Topic 4.4):Term Structure, Junk Bonds, and Bankruptcy FIN 614: Financial Management Larry Schrenk, Instructor

More Related