Hostname: page-component-78c5997874-94fs2 Total loading time: 0 Render date: 2024-11-15T13:11:31.222Z Has data issue: false hasContentIssue false
  • English
  • Français

Implied Fixed Costs of Long-Term Debt Issues

Published online by Cambridge University Press:  19 October 2009

James C. Van Horne
Get access Rights & Permissions [Opens in a new window]

Extract

In this paper, a model is developed for deriving the implied fixed cost of a bond flotation. Using a sample of electric utility companies over the 1961–1970 period, implied fixed costs are computed for 318 bond issues. These fixed costs then are evaluated in an effort to cast light on whether companies behave optimally with respect to the size and frequency of bond issues. Regression results are consistent with the adjustment of debt issuing behavior in keeping with: (1) expectations about the future course of interest rates; (2) variable costs increasing at a decreasing rate with the size of individual issue; and (3) differences in the cost of carrying excess liquidity which arise from differences in quality rating. An estimate of the average fixed cost of issuing bonds is evaluated as is the debt issuing behavior of individual companies. Over all, the model and its testing give considerable insight into the implied fixed costs of issuing debt.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 8 , Issue 5 , December 1973 , pp. 821 - 833
Copyright
Copyright © School of Business Administration, University of Washington 1973

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

[1]Baumol, William J. “The Transactions Demand for Cash: An Inventory Theoretic Approach.” Quarterly Journal of Economics, vol. 65 (November 1952), pp. 545–556.Google Scholar
[2]Bierman, Harold Jr. “The Bond Issue Size Decision.” Journal of Financial and Quantitative Analysis, vol. 1 (December 1966), pp. 1–14.Google Scholar
[3]Bierman, Harold Jr., and McAdams, Alan K.. “Financial Decisions and New Decision Tools.” Financial Executive, vol. 32 (May 1964), pp. 23–30.Google Scholar
[4]Cost of Flotation of Corporate Securities, 1951–1955. Washington, D.C.: Securities and Exchange Commission, 1957.Google Scholar
[5]Friend, Irwin; Longstreet, James R.; Mendelson, Morris; Miller, Ervin; and Hess, Arleigh P. Jr.Investment Banking and the New Issues Market. Cleveland, Ohio: World Publishing Co., 1967.Google Scholar
[6]Johnston, J.Econometric Methods. New York: McGraw-Hill, 1963.Google Scholar
[7]Kessel, Reuben H.The Cyclical Behavior of the Term Structure of Interest Rates. New York: National Bureau of Economic Research, 1965.Google Scholar
[8]Litzenberger, Robert H., and Rutenberg, David P.. “Size and Timing of Corporate Bond Flotations.” Journal of Financial and Quantitative Analysis, vol. 7 (January 1972), pp. 1343–1360.Google Scholar
[9]Rao, Potluri, and Miller, Roger LeRoy. Applied Econometrics. Belmont, Calif.: Wadsworth Publishing Co., 1971.Google Scholar
[10]Salomon Brothers. An Analytical Record of Yields and Yield Spreads, 1971.Google Scholar
[11]Van Horne, James C.Function and Analysis of Capital Market Rates. Englewood Cliffs, N. J.: Prentice-Hall, 1970, Chapter 4.Google Scholar