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Principles of Finance Videos 166 videos

Principles of Finance: Unit 1, Company Formation, Structure, Inception
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How is a company... born? Can it be performed via C-section? Is there a midwife present? Do its parents get in a fight over what to name it? In thi...

Principles of Finance: Unit 1, Intro: Company Formation, Structure, and Inception: Unit Intro
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Company Formation, Structure, and Inception: Unit Intro. Sorry, Leo DiCaprio fans—we're not going to be breaking down the plot of Inception. We'r...

Principles of Finance: Unit 1, Alex, That’s Finance Potpourri for $500
67 Views

Okay, so you want to be a company financial manager. It's basically up to you to make money for the shareholders. It would also be swell if you mad...

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Principles of Finance: Unit 5, Redeeming Bonds 8 Views


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Description:

How do you redeem a bond? Can you just do that in the checkout line at Costco?

Language:
English Language

Transcript

00:00

Principles of finance a la shmoop... Redeeming bonds, Robert Downey jr, Paula [Robert Downey Jr and Paula Abdul walking out of rehab]

00:09

Abdul, Shawshank Redemption well Redemption is the paying off of a

00:14

debt the principle that was originally borrowed you borrowed the money you paid

00:18

the interest on it for awhile and then you paid it off you redeemed yourself

00:23

from your shameful need of having to borrow money or take on debt that's more

00:29

or less where the term came from anyway we've highlighted the value

00:33

of a sinking fund created so that redemption is oh so much easier the idea

00:39

is to set things up so that the heavy load of debt on the corporate ship can [Ship carrying debt sailing in the ocean]

00:44

be sunk along the way without violent financial shock when the full amount of

00:48

the loan is you know suddenly due and corporate CFOs are always on the lookout [Person looking through binoculars at store closing sale]

00:53

for a deal it's their job....Joe Bob Billy has a billion dollars par value of nine

01:01

percent coupon bonds which were issued in a much tougher credit market than

01:05

exists today those bonds now trade for a hundred seventeen cents on the dollar or

01:10

a 17 percent premium to par they are callable next quarter at 103 meaning

01:16

that there is a three percent premium to call the bonds but the modern you, hello

01:21

are told that you can refinance everything for a coupon of about five [Mr Joe Bob Billy's e-mail to refinaince coupon of 5.5%]

01:25

and a half percent the savings of three point five percent Interest per year

01:30

that's that nine percent minus the five point five percent on that amount of

01:34

money is worth the hassle and fees of doing it so you pay the 103 or three

01:38

percent premium to call all the bonds ie you buy them back and we'll simply issue

01:42

new debt at the lower price and save your company a ton of interest costs

01:47

that process is called refunding you funded this company wants with the nine

01:52

percent money now you're just doing it again with five and a half percent money [Joe holding 5.5% coupon bond]

01:56

and if the markets were really liquid and forgiving well then you that

02:00

crackerjack CFO might pre-refund that is before your bonds are even callable

02:06

you'd issue new cheap debt so that the money is already in place for you when

02:10

your bonds are in fact callable.. rates might have

02:13

for a month dipped below 5% and it's worth the fifty basis points spread for [Coins falling]

02:18

a few quarters to pay that extra interest just to lock in the ultra cheap

02:22

low rate and have no more market risk in going out for loans when it actually

02:27

needs to happen like when you actually need the money rather than just want it

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