Liabilities management

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course requirement for Management Advisory Services subject.

Transcript of Liabilities management

  • 1. Risk comes from not knowing what youre doing. -Warren Buffet Powerpoint Templates Page 1
  • 2. Liabilities Management LONG TERM FINANCING Powerpoint Templates Page 2
  • 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. Debt Financing Debt financing takes the form of loans that must be repaid over time, usually with interest. Powerpoint Templates Page 4
  • 5. What are Bonds? Powerpoint Templates Page 5
  • 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. Market Price of Bonds Yield 7% Bond Stated Interest Rate 10% Premium 10% Face Value 13% Discount Powerpoint Templates Page 16
  • 17. Discount If Effective Rate is GREATer Powerpoint Templates Page 17
  • 18. Bond Valuation Mathematics Formula: PV of Bond = PV of Principal + PV of Interest Powerpoint Templates Page 18
  • 19. Problem: Given: $1000 par value bond, 15 years Coupon rate: 13% or 7% Effective Rate: 10% 1. 15-year bonds with 13% annual rate 2. 15-year bonds with 7% annual rate PV= PV of Principal + PV of Interest = 239.39 + 988.79 = 1,228.18 Amortization: Year 1: 1228.18 x 10% = 122.82 1000.00 x 13% = 130.00 PV= PV of Principal + PV of Interest = 239.39 + 532.43 = 771.82 Amortization: Year 1: 771.82 x 10% = 77.18 1000.00 x 7% = 70.00 Powerpoint Templates 7.18 7.18 Page 19
  • 20. Bond Value ($) 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. 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 bonds volatility Bonds volatility is lower than stocks Powerpoint Templates Page 21
  • 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. No matter how great the talent or efforts, some things just take time. You cant produce a baby in one month by getting nine women pregnant. -Warren Buffet Powerpoint Templates Page 23