FINS5512 Chap.6 Long-Term Debt Markets
Long-Term Debt Markets
Long-term funding can come through mortgages, leases or tradeable debt. This chapter compares their control, collateral, payment and market-access consequences, then values a fixed-coupon bond as the present value of coupons and principal.
The price-yield relationship gives the core direction check: required yield above coupon implies a discount, yield below coupon implies a premium, and longer maturity increases sensitivity. Match coupon timing, yield timing and maturity periods before discounting any cash flow.
Turn every long-term financing question into a contract comparison before choosing a product.
A mortgage links borrowing to pledged property and scheduled repayment. A lease grants use of an asset under agreed payments and control terms. A bond distributes a tradeable promise across capital-market investors and brings issue, disclosure and covenant requirements. Compare security, ownership or use, payment certainty, scale, transaction cost, flexibility and refinancing exposure.
For valuation, draw each coupon and the final principal on a timeline, then convert the required yield to the same period as the payments. Price is the sum of those present values. The direction check is immediate: yield above coupon produces a discount, equality produces par and yield below coupon produces a premium. Longer maturity and lower coupon generally increase sensitivity because more value sits in distant cash flows.
Keep credit and interest-rate mechanisms separate. A higher market yield reduces present value even if promised payments remain unchanged; deteriorating repayment expectations can also lower price but through credit risk. As maturity approaches, fewer discounted payments remain and a solvent bond price tends toward face value.
If payments are semiannual, convert coupon and yield to half-year periods and double the number of periods rather than mixing clocks. In recommendations, do not rely solely on a forecast that rates will rise or fall. Fixed borrowing supplies certainty, shorter or floating exposure creates repricing opportunities and refinancing risk, and the issuer must be able to absorb an adverse forecast error.
State the selected route, why it fits the asset and issuer, its main contractual cost and the risk that remains.
What this chapter covers
- 01
Mortgage funding and secured claims
- 02
Leasing and asset-use rights
- 03
Bond issuance and tradeable debt
- 04
Coupon and principal present values
- 05
Premium, par and discount relationships
- 06
Maturity and interest-rate sensitivity
Worked example · free
Price a three-year coupon bond
- +1Discount the first $60 coupon to $55.56.
- +1Discount the second $60 coupon to $51.44.
- +1Discount the final $1,060 payment to $841.48.
- +1Total price is $948.48, a discount because yield exceeds coupon.
Key terms
- Coupon rate
- The stated rate used to determine a bond's periodic coupon payment.
- Required yield
- The return investors demand and use to discount promised bond cash flows.
- Interest-rate risk
- The sensitivity of a debt instrument's market value to changes in required yield.
Long-Term Debt Markets FAQ
Why does bond price fall when yield rises?
The promised coupon and principal cash flows remain fixed while investors apply a larger discount rate. Their present values therefore decline. The inverse relationship is a present-value effect, not a change in the bond's face value.
When does a bond sell at a premium?
A bond sells above face value when its coupon rate is greater than the required yield under consistent payment conventions. Investors pay more because the contractual coupon stream is more attractive than the current market requirement.
Why are longer-maturity bonds more sensitive?
More of a long bond's value lies in distant cash flows. A change in yield compounds through more discount periods, so present value moves further than it generally would for a shorter bond with the same coupon and yield.
Exam move
Draw the bond cash-flow ladder before using a formula. Mark each coupon date, place face value with the last coupon, and convert the quoted yield to the same payment period. Calculate coupon present values and principal present value separately so a missing maturity payment is obvious. Memorise the direction triangle: yield above coupon means discount, yield equal to coupon means par, and yield below coupon means premium.
Compare maturities by explaining why distant cash flows receive more repeated discounting. For financing recommendations, do not treat valuation as the whole answer. Compare a mortgage, lease and bond issue on collateral, ownership or use, payment flexibility, issue size, covenants, transaction costs and market access.
The current folder's Week 6 workshop labels itself an earlier term, so use it only as question-shape corroboration and rely on the current Term Planner and lecture topic for offering-specific statements. End each calculation with a price classification and interest-rate-risk interpretation.
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