course requirement for Management Advisory Services subject.

1. “Risk comes from not knowing what
you’re doing.”
-Warren Buffet
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2. Liabilities Management
LONG TERM FINANCING
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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
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4. Debt Financing
Debt
financing
takes the
form of loans
that must be
repaid over
time, usually
with interest.
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5. What are Bonds?
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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
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7. Risk and Challenges
in Issuing Bonds
1.
2.
3.
4.
5.
Financial Risk
Refinancing Risk
Large Bullet Payment
Administration Cost
Disclosure Requirements
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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
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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.
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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
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No specified
maturity
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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
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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
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13. Bonds
(Debt Financing)
Basic Types of Bonds
1. Debenture Bonds
2. Mortgage Bonds
• Open-end
• Closed-end
3. Income Bonds
4. Serial Bonds
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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
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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?
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16. Market Price of Bonds
Yield
7%
Bond
Stated
Interest
Rate
10%
Premium
10%
Face Value
13%
Discount
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17. Discount
If
Effective Rate is
GREATer
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18. Bond Valuation Mathematics
Formula:
PV of Bond = PV of Principal + PV of Interest
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19. Problem:
Given: $1000 par value bond, 15 years
Coupon rate: 13% or 7%
Effective Rate: 10%
1. 15-year bonds with 13%
annual rate
2. 15-year bonds with 7%
annual rate
PV= PV of Principal + PV of
Interest
= 239.39 + 988.79
= 1,228.18
Amortization:
Year 1: 1228.18 x 10% = 122.82
1000.00 x 13% = 130.00
PV= PV of Principal + PV of
Interest
= 239.39 + 532.43
= 771.82
Amortization:
Year 1: 771.82 x 10% = 77.18
1000.00 x 7% = 70.00
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20. Bond Value ($)
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
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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 bond’s volatility
 Bonds volatility is lower than stocks
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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
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23. “No matter how great the talent or
efforts, some things just take time. You
can’t produce a baby in one month by
getting nine women pregnant.”
-Warren Buffet
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