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Principles of Finance: Unit 5, Serial Bonds and Laddering 14 Views


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In this vid, we're talking serial bonds, bond duration, and...laddering. Make sure you've got a spotter.

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Transcript

00:00

Principles of finance ah la shmoop serial bonds laddering and

00:05

bond duration Okay so you're the wily cfo of capital

00:11

pig dot com you need to raise debt all the

00:15

time because the underground fourteen thousand miles of tunnels your

00:18

company is building before it can receive any revenues will

00:22

rip quirot lots and lots of dough If you went

00:25

out to the market today to try and raise twenty

00:27

five billion dollars have dead well that would be hugely

00:30

inefficient because you can't spend more than a billion dollars

00:34

a quarter digging those tunnels and like why would you

00:36

pay to rent twenty five thousand square feet of housing

00:39

when you only need a thousand square feet toe livin

00:41

Well debt works kind of the same way so you

00:44

decide that you're going to do a bond offering serially

00:47

that is you're going to offer bonds in the amount

00:49

of five billion dollars per offering every year for the

00:52

next five years so that you roughly match your capital

00:56

needs with your cash inflows from the buyers of debt

00:59

you're selling to all around the world so now you'll

01:01

roll the clock forward six years and it turns out

01:04

there's a nice little business driving underground all around los

01:08

angeles because traffic there is so plugged with out of

01:11

work actors delivering pizza Well luckily we issued buns in

01:14

away such that all did not come do at the

01:17

same time had we raised twenty five billion dollars up

01:20

front and just sat with the money in our bank

01:23

account Well would've cost the company of fortune in interest

01:26

or money rental rates during that time when we didn't

01:29

need it What a waste But we raised the money

01:31

in smaller pieces with each bond being a ten year

01:34

duration and after six years the very first five billion

01:37

dollars offering is not all that far away from coming

01:40

do well Luckily interest rates have come down a bit

01:42

and there's plenty of demand in the bond market for

01:45

buyers as most people love avoiding traffic and we're set

01:48

up to make another five billion dollar bond offering the

01:51

proceeds of which will replace the five billion dollars of

01:54

principle we have coming due in four years Well the

01:56

key thing to note here is that we're a matching

01:58

our capital raise needs with the duration of the bond

02:02

The nightmare scenario would have been our raising that twenty

02:05

five billion dollars all at once having it come to

02:07

all the same week and then our not being able

02:09

to raise twenty five billion dollars at the time to

02:12

replace it That's one popular and loving way that companies

02:16

go bankrupt In fact there's a famous case from gannett

02:19

newspapers proud owners of myriad television stations local newspapers and

02:23

use a today among other properties the company in the

02:25

mid eighties never imagined that the newspaper industry could stumble

02:29

and fall on hard times at least hard enough so

02:31

that this once vaunted nifty fifty company would actually have

02:34

problems raising debt against what it thought at the time

02:38

were unassailably good assets Well then along came the financial

02:41

crisis of a wayto nine and the one hundred thirty

02:44

year plus ginette newspaper company almost went bankrupt because nearly

02:49

all of its dead came due at the same time

02:51

in the newspaper company simply couldn't raise the dough well

02:53

cos generally like toe ladder there bond offerings and many

02:57

small pieces to avoid just such a crisis And generally

03:01

speaking they manage this laddering in two basic ways first

03:05

They make offerings of bonds every year or two or

03:07

three in small amounts This's actually smart business because it

03:11

gives the management and excuse to hop on a plane

03:14

and make personal direct contact with all of its existing

03:17

bondholders holding their hands And you know other body parts

03:21

if necessary to convey that all is good under the

03:24

circus tent and that their investment is safe But companies

03:28

also ladder the due dates of their bonds by offering

03:30

them with siri's of different durations like a company might

03:35

offer At the same time One siri's of bonds coming

03:38

due in five years and another siri's coming doing ten

03:41

And yet another coming due in thirty in this way

03:43

cos protect themselves from what is called a liquidity squeeze

03:48

or a time like the financial crisis of a wayto

03:51

nine when nobody was invested in nothing other than bankruptcy

03:55

lawyer firms that's like saying that the hottest business in

03:57

your town is the local mortician and that's Not a 00:04:00.755 --> [endTime] good sign

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