Junk Bonds & Long Term Debt   Term Paper ID:27481 Click to get this paper

Essay Subject: Reviews traditional debt instruments including term loans, different types of bonds, & debentures. Specific features of debt contracts are analyzed. Details recent innovations including zero coupon bonds, floating rate debt, & junk bonds.... More...

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Paper Abstract: Reviews traditional debt instruments including term loans, different types of bonds, & debentures. Specific features of debt contracts are analyzed. Details recent innovations including zero coupon bonds, floating rate debt, & junk bonds. Paper Introduction: Introduction Chapter 15 in Brigham deals with the topic of long-term debt. The chapter first presents an overview of traditional debt instruments including term loans, different types of bonds and debentures. Specific features of debt contracts are then analyzed including agency problems for bondholders, call provisions and sinking funds. Recent innovations in bonds are then discussed including zero coupon bonds, floating rate debt and junk bonds. The chapter concludes with a more detailed discussion of bond ratings and the factors which influence long-term financing decisions. Issues Brigham defines a bond as a long-term contract under which Text of the Paper: The entire text of the paper is shown below. However, the text is somewhat scrambled. We want to give you as much information as we possibly can about our papers and essays, but we cannot give them away for free. In the text below you will find that while disordered, many of the phrases are essentially intact. From this text you will be able to get a solid sense of the writing style, the concepts addressed, and the sources used in the research paper. debt contracts are then analyzed including the factors which influence long-term financing notes that bonds are similar to term loans years there has beenan increase to Michael Milken ofthe former investment banking firm risk Armed with such evidence Milkenbegan to convince corporate America and the American financialsystem view that high default risk bonds wouldnot be attractive skewed outcomes offered by the instrument disprove that view Before development of the junk off from credit With the advent investing public in general There appeared to bank liabilities are backed by the Federal Deposit by the U S government Hence the risks of thisinvesting to corporations Junk bond issues give market theinterested public establishes the was impressive but also controversial The theyield spread increased to to basis points At that point of junk bonds to suffer defaults it is maintained that because rate Therefore focusing exclusively on out by early DrexelBurnham Lambert was forced into bankruptcy had produced aparadoxically higher investment return than issued late in theCoolidge boom It since the turn of the century was one support the proposition ofdeteriorating credit conditions toward the end new financing default ratestending to be high on securities a ready market onlywhen the market is buoyant and some of the unpublicized pronouncements that Hickman hadmentioned in a merger orleveraged based No longer were earnings depreciation was treated as an imaginaryexpense a marginal debtor could of credit-worthiness The end-result was a picture of decline in percent and percent of thecapitalization of by two to one inthe early s bond market still has an important role to play incorporate debt capabilitiesbeyond the earlier parameters and in by companies with low bond ratings What is interesting about Long-Term debtshould be more sensitive to such an issue It common stocks orreal estate investment In fact it can public swayed by over-optimism seeks more of theeconomy an almost natural move toward overoptimism After a two to three cycles while the cyclicaladvances become collapsing andsomeone like Milken going to argue that the debt ratingof extent be determined bythe stage of management th ed Orlando FL The Dryden Press Hickman W bond mortality andperformance Journal of Finance Wigmore B A The an overview of traditional debt instrumentsincluding term loans including zero coupon bonds floating rate debtand junk bonds The and principal on specific dates chapter also points out that whilebonds became quite popular in the They tended to show that risky bonds yielded morethan look more closelyat the nature of junk bonds the evidence innovation with wide impact throughout the financial system Before be acceptable to the borrower This view value but the loss could be as large as the or finance companies on a short-term to market In essence the junk indirectly by all U S citizens who may not wish eventually have to pay Theliabilities of other investors commercial bank loans are typically based ontheir credit analysis when junk no access Fabozzi As Chapter points out the and ranged from to basis points In late investment perspective that default ratesby themselves are not of theportfolio is sufficiently high to offset the investment thedefault loss rate bonds would suffer assumingall defaulted bonds would be totally worthless tosome weakness in the original analysis made by Milken It actually said a great deal more His study with those issuedearlier This rise in the default rate stood tarnish the quality of corporate debt Hickman statedin his Hickman also observed that the trends seem to suggest that someissues perhaps a buoyant market in junk bonds between and However in Between and Wigmore noted over standard test became earnings before interest issued by financial institutions and public utilities To these to overlook or explain away Thus for it had averaged percent Earnings beforeinterest and the point in chapter that despite the debacles off Brigham argues that the development ofthe junk bond market maintainsthat well over half of the junk bonds issued in of junk-bonds made in the mid in credit quality in a period marked byan ever-increasing inefficiency Thus generally in the field of of higher yield greater risk and poorer is a mild contraction which leads people estate junk-bonds or the stock market gradually showing new strength and investorinterest It may indeed a bankruptcy has nowhere togo to stringency although the timing Princeton MA Princeton UniversityPress Fabozzi F J The new high-yield Introduction Chapter in Brigham deals with the topic agency problems forbondholders call provisions and decisions Issues Brigham defines a bond as a long-term contract but a bond issue is generally advertised offered to in the use of various types Drexel Burnham Lambert According tothe chapter Milken certain institutional investors of the merits of its infatuation with junk Analysis to the investing public at The maximumreturn that an investor bond market U S corporations thatcould not issue securities in of the junk bondstructure financing be severaladvantages to such a shift First when commercial InsuranceCorporation If high credit risk corporations are primarily accepted by the specific investor corporations the opportunity to issue long-term rate Finally the junk bond marketopens the possibility of promised yields offeredon junk bonds were substantial For example the issuebecame whether such a spread was justified based on and tooutperform Treasuries at the same time holders of defaulted bondstypically recover default rates merely highlights the worst and Michael Milken was sent tojail These events tarnished the high-grade bonds over the firstfour indicated that defaults occurred with greater frequencyamong bonds of decliningrates of default Hickman's statistical of major cycles and of apossibly tightening up of issued during years of high financialvolume and that in periods of market pessimism onlythe top grade issues his study Wigmore argued that the quality before interest and taxes theconventional parameter be made to look nearly solvent Wigmore examined every the quality of junk-bond issues and a decline junk-bond-issuing companies in and In thefirst but by less than one financing He believes that outside of takeovers spite of all the publicitysurrounding the use Brigham's arguments is the possibility thatit ignores the broader credit certainly appears to be thecase that be argued that the history of thebusiness and more after securities of higher severedownturn industrial activity does rebound yet speculation progressively smaller in industrial activity they maybecome larger in jail Then the entire process a triple-A-rated corporation has nowhere to go but the credit cycle in which it is enfolded Leniency in B Corporate bond quality and investor experience decline in credit quality of junk bondissues NY Goldman Sachs different types of bonds and debentures Specificfeatures of chapter concludes with a more detailed discussion ofbond ratings and to theholder of the bond Brigham normally have a fixed interest rate in recent s Thechapter attributes the innovations in this instrument enough to compensate for their supporting the Hickman data aswell as the consequences for Milken there was a common supposedly rested on thenature of the principal invested Hickman Milken attempted to intermediate-termbasis or would be shut bond market shifted the risk from commercial banksto the to accept that risk The reason is thatcommercial excluding thrifts that did invest in junkbonds are not backed short-term fixedrate loans which made debt financing less attractive bonds are traded in a public phenomenal growth of the junk bondmarket and a more turbulent time for the junk bond market paramount significance meaning that it isperfectly possible for a portfolio the losses from default Furthermore is substantially lower than the default Altman However as the Brigham chapter points was Hickman'sstudy that supposedly showed that high-yield bonds alsoanalyzed the apparent decline in credit quality of bonds out according to Hickman because the tendency analysis that there was some evidence to in default rates werecomparable with trends in net and gross those of marginal quality can find Barrie A Wigmore published an analysis whichseemed to support percent of junk-grade debt was incurred in the course of taxes anddepreciation This meant that if issues in all he applied five standard tests instance common equity the owners' interest amounted to just taxes had sufficed to cover interest expense of thelate s the junk has expanded the limits of a firm's recent years have been usedfor normal expansion purposes s It would seem that a chapter on of financial exhilaration whether it is junk-bonds or investmentit may indeed be the case that the buying quality There does seem to exist within the financial structure to be lesscautious Consequently in the next and adrastic liquidation begins with for example Drexel Burnham be the case as Milken used to put up However this pattern may to a large isnever predictable References Brigham E F Fundamentals of financial debt market NY Harper andRow Altman E September Measuring corporate of long-term debt Thechapter first presents sinking funds Recent innovations inbonds are then discussed under which a borroweragrees to payments of interest the public and usuallysold to many different investors The of floating rate bonds Brigham notes that junk bonds initially relied on the historical studies of W Braddock Hickman ofpurchasing risky debt The analysis which follows will The introduction of high-yield junk bonds became a very importantfinancial least at interest rates thatwould was perceived as obtaining is capped by the couponand face the public debt market would borrow fromcommercial banks shifted from commercial banks to the public banks lend to highcredit risk borrowers that risk is accepted default on their loans causing an FDIC bailout all taxpayers group willing toaccept them Furthermore fixed-rate debt In addition commercial banks set interest rates credit for some firms that had the yield spread overTreasury bonds between a higher potentialdefault rate Some have argued from an provided the yield spread of at least of the face amount of possibleoutcome that a diversified portfolio of junk junk bond market and perhaps point decades of the century But Hickman and mortgages issued late in the s than work appeared to support the proposition thatprosperity seemed to credit standards near the beginning of new majorcycles vice versa Such an analysis would can be placed Certainly there was of junk bonds declined as the volumeof their issuance increased in bond-market analysis expected to cover interestexpense The underwritten junk-bond issue from to except those that apparently many junk-bond analysts hadmanaged few years of the decade to one in Summary Brigham makes and LBOs thejunk bond cannot be written of junk bonds in mergers and acquisitions he cycle as did many of the studies there is an apparent decline cycle shows that the stage of prosperity in general is yield and investmentbankers under the stress of competition issue securities is quite limited Then perhaps there speculative activity Finally the speculative boomcollapses whether in real starts up againwith the junk bond market again down whereas therating of a speculative-grade company barring creditmarkets seems to eventually turn National Bureau of Economic Research and Co debt contracts are then analyzed including the factors which influence long-term financing notes that bonds are similar to term loans years there has beenan increase to Michael Milken ofthe former investment banking firm risk Armed with such evidence Milkenbegan to convince corporate America and the American financialsystem view that high default risk bonds wouldnot be attractive skewed outcomes offered by the instrument disprove that view Before development of the junk off from credit With the advent investing public in general There appeared to bank liabilities are backed by the Federal Deposit by the U S government Hence the risks of thisinvesting to corporations Junk bond issues give market theinterested public establishes the was impressive but also controversial The theyield spread increased to to basis points At that point of junk bonds to suffer defaults it is maintained that because rate Therefore focusing exclusively on out by early DrexelBurnham Lambert was forced into bankruptcy had produced aparadoxically higher investment return than issued late in theCoolidge boom It since the turn of the century was one support the proposition ofdeteriorating credit conditions toward the end new financing default ratestending to be high on securities a ready market onlywhen the market is buoyant and some of the unpublicized pronouncements that Hickman hadmentioned in a merger orleveraged based No longer were earnings depreciation was treated as an imaginaryexpense a marginal debtor could of credit-worthiness The end-result was a picture of decline in percent and percent of thecapitalization of by two to one inthe early s bond market still has an important role to play incorporate debt capabilitiesbeyond the earlier parameters and in by companies with low bond ratings What is interesting about Long-Term debtshould be more sensitive to such an issue It common stocks orreal estate investment In fact it can public swayed by over-optimism seeks more of theeconomy an almost natural move toward overoptimism After a two to three cycles while the cyclicaladvances become collapsing andsomeone like Milken going to argue that the debt ratingof extent be determined bythe stage of management th ed Orlando FL The Dryden Press Hickman W bond mortality andperformance Journal of Finance Wigmore B A The an overview of traditional debt instrumentsincluding term loans including zero coupon bonds floating rate debtand junk bonds The and principal on specific dates chapter also points out that whilebonds became quite popular in the They tended to show that risky bonds yielded morethan look more closelyat the nature of junk bonds the evidence innovation with wide impact throughout the financial system Before be acceptable to the borrower This view value but the loss could be as large as the or finance companies on a short-term to market In essence the junk indirectly by all U S citizens who may not wish eventually have to pay Theliabilities of other investors commercial bank loans are typically based ontheir credit analysis when junk no access Fabozzi As Chapter points out the and ranged from to basis points In late investment perspective that default ratesby themselves are not of theportfolio is sufficiently high to offset the investment thedefault loss rate bonds would suffer assumingall defaulted bonds would be totally worthless tosome weakness in the original analysis made by Milken It actually said a great deal more His study with those issuedearlier This rise in the default rate stood tarnish the quality of corporate debt Hickman statedin his Hickman also observed that the trends seem to suggest that someissues perhaps a buoyant market in junk bonds between and However in Between and Wigmore noted over standard test became earnings before interest issued by financial institutions and public utilities To these to overlook or explain away Thus for it had averaged percent Earnings beforeinterest and the point in chapter that despite the debacles off Brigham argues that the development ofthe junk bond market maintainsthat well over half of the junk bonds issued in of junk-bonds made in the mid in credit quality in a period marked byan ever-increasing inefficiency Thus generally in the field of of higher yield greater risk and poorer is a mild contraction which leads people estate junk-bonds or the stock market gradually showing new strength and investorinterest It may indeed a bankruptcy has nowhere togo to stringency although the timing Princeton MA Princeton UniversityPress Fabozzi F J The new high-yield If this paper is not what you are looking for, you can search again: Search for: or Click here to request an essay written just for you.

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