The interest-only payment received regularly by the bondholders. The coupon rate
times the face value is the total interest paid annually. If the bond is European-style,
coupon payments are annual, whereas American-style bonds make semiannual
payments.
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coupon payment
,When the firm gets close to bankruptcy without entering it, it will suffer from lost
sales, suppliers changing the terms of their contracts, difficulty in retaining and
attracting talented employees, and managerial distraction.
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financial distress costs
A bond that makes a single coupon payment each year. The amount equals the
coupon rate times the face value.
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European-style
The date specified in the indenture on which the issuer pays the principal amount of a
bond, thus paying off the loan
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maturity date
The overall rate of return a firm must get from its assets. It is also known as the
discount rate, the required return, the return on assets, and the cost of capital.
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, weighted average cost of capital, or WACC
The idea that similar assets should have similar prices. Deviations from the law of one
price create profit opportunities for astute traders. Their trades change market prices
and restore the law of one price.
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law of one price
When a firm increases its use of debt relative to equity to finance a firm's assets. This is
achieved by issuing debt, typically bonds, in the primary markets and using the
proceeds to repurchase shares of stock in the secondary market. Though no assets
change in the transaction, the firm's debtto-equity ratio increases. In terms of a
balance sheet, the assets on the left-hand side remain fixed while the claims on those
asset represented by the right-hand side change.
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levering up
The value of the firm is maximized when the marginal benefit from another dollar of
debt due to the interest tax shield equals that dollar of debt's marginal cost due to
expected financial distress
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times the face value is the total interest paid annually. If the bond is European-style,
coupon payments are annual, whereas American-style bonds make semiannual
payments.
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coupon payment
,When the firm gets close to bankruptcy without entering it, it will suffer from lost
sales, suppliers changing the terms of their contracts, difficulty in retaining and
attracting talented employees, and managerial distraction.
Give this one a try later!
financial distress costs
A bond that makes a single coupon payment each year. The amount equals the
coupon rate times the face value.
Give this one a try later!
European-style
The date specified in the indenture on which the issuer pays the principal amount of a
bond, thus paying off the loan
Give this one a try later!
maturity date
The overall rate of return a firm must get from its assets. It is also known as the
discount rate, the required return, the return on assets, and the cost of capital.
Give this one a try later!
, weighted average cost of capital, or WACC
The idea that similar assets should have similar prices. Deviations from the law of one
price create profit opportunities for astute traders. Their trades change market prices
and restore the law of one price.
Give this one a try later!
law of one price
When a firm increases its use of debt relative to equity to finance a firm's assets. This is
achieved by issuing debt, typically bonds, in the primary markets and using the
proceeds to repurchase shares of stock in the secondary market. Though no assets
change in the transaction, the firm's debtto-equity ratio increases. In terms of a
balance sheet, the assets on the left-hand side remain fixed while the claims on those
asset represented by the right-hand side change.
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levering up
The value of the firm is maximized when the marginal benefit from another dollar of
debt due to the interest tax shield equals that dollar of debt's marginal cost due to
expected financial distress
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