Presentation is loading. Please wait.

Presentation is loading. Please wait.

BORROWING Debt Administration Debt Structure & Design Appropriate Debt Policy.

Similar presentations

Presentation on theme: "BORROWING Debt Administration Debt Structure & Design Appropriate Debt Policy."— Presentation transcript:

1 BORROWING Debt Administration Debt Structure & Design Appropriate Debt Policy

2 THE NATURE OF BORROWING A transaction involving two parties, the borrower and the lender Borrowers get purchasing power now in return for an obligation to repay later Lenders give up current purchasing power in return for the promise of repayment later Bonds are the standard form taken by long- term obligations to repay debt

3 Vanilla BONDS Obligations to pay a face amount or par value (principal) at a specified retirement or maturity date and to make contractual interest payments until the debt is retired The stated or nominal interest on a bond is its coupon rate, the percentage of par value that will be paid on a regular basis, usually biannually. For example, a 9% coupon rate means that the bond pays $90 per $1000 each year Issuers sell bonds Bond holders buy them, either at issue or in secondary markets

4 Yield Yields often differ from coupon rates substantially The present value of the bond may differ from the face value substantially Markets set bond values and implicitly a bond’s discount rate (reflecting the current time value of money) The current bond price equals the present value of the cash flow to which the bondholder is entitled

5 DEBT STRUCTURE AND DESIGN CRITERIA Least-cost marketability Ease of administration Provision of appropriate cost signals Appropriate risk characteristics VARIABLES Type of security (denomination, backing) Maturity Term or Serial Options and derivative issues

6 Bids DETERMINATION Denomination Yield Structure of Bond The economy and governance of the bond issuer Its debt history Rating Availability of Bond Insurance EVALUATION Underwriters package and sell government debt TIC -- use IRR function on spreadsheet to calculate

7 DEBT POLICY REASONS FOR DEBT Revenue shortfalls –Structural deficits –Cyclical deficits –Temporary liquidity problems due to the timing of cash flows Capital-project construction CONSIDERATIONS Borrowing cost vs. tax cost Effect upon future solvency -- you really want to be able to borrow when you need to, not just when you want to Timing

Download ppt "BORROWING Debt Administration Debt Structure & Design Appropriate Debt Policy."

Similar presentations

Ads by Google