Beruflich Dokumente
Kultur Dokumente
Week 4 Debt
Chapters 9, 10 and 11
Mark W. Werman
Learning objectives
Overview of the characteristics of various forms of
short-term debt
Main types
Trade credit, bank overdraft, commercial and
bank-accepted bills, promissory notes,
negotiable certificates of deposit, inventory
accounts receivable and factoring
Sources
Reasons and patterns of use
Advantages and disadvantages for borrowers and
lenders
Calculations relevant to discount securities
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Trade Credit
From providers perspective
Advantages include increased sales
Disadvantages include:
costs of discount and increased discount
period,
increased total credit period and accounts
receivable,
increased collection and bad debt costs
Opportunity cost
% discount
365
99.0 23
0.160298 or 16.03% p.a.
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12
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14
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17
18
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Easier:
price
FV = face value
r = yield
t = time
days/365 or
days/360
FV
1 rt
20
price
price
Fv
1 rt
Fv
1 rt
$500, 000
$496,118.04
30
1 0.0952*
365
$500, 000
$496,134.23
30
1 0.0948*
365
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365 (
yield
days to maturity)
100
]
365
Alternative method:
Fv Pv 1 rt
23
$507 191.78
365
60
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Calculating yield
Yield
buy price
days to maturity
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26
9.70%
496 134.23
7
9.39%
497 057.36
23
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]
days in year
100
(cont.)
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29
30
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Discountrate
face value
days to maturity
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100 000
180
0.08 202.778
Discountrate
16.22%
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33
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Promissory Notes
Issues may also be non-underwritten
Issuer may approach money market directly
Commercial bank, investment bank or merchant
bank may be retained as lead manager and
receive fees
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12
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38
39
13
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9.8 Summary
Short-term debt is appropriate for funding short-term
assets (matching principle)
Trade creditsimple and common
Bank overdraftcommon
Discount securities
Bill financingimportant source of funds
Promissory notes (P-notes)good credit rating
required
Certificates of deposit (CDs)issued by banks to
manage liabilities and liquidity
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14
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Summary
Inventory loans, accounts receivable finance and
factoringalternative sources of finance for small
and medium-sized businesses
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Learning objectives
Identify the main types of medium- to long-term debt
instruments in the market
Term loans or fully drawn advances, mortgage
finance, bond markets (debentures, unsecured
notes and subordinated debt) and lease financing
Describe the main features of these facilities
Identify the financial institutions and parties involved
in the provision of these facilities
Undertake calculations related to the pricing of
these debt instruments
Discuss the availability and appropriateness of
these debt instruments for business
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45
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Term Loan
Fully drawn advance
A term loan where the full amount is provided at
the start of the loan
Provided by:
mainly commercial banks and finance
companies
to a lesser degree, investment banks, merchant
banks, insurance offices and credit unions
46
47
(cont.)
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Term loans
Interest rate charged is also influenced by:
credit risk of borrowerrisk that borrower
may default on loan commitment, giving rise
to a risk premium
term of the loan
usually longer term attracts a higher interest rate
repayment schedule frequency of loan
repayments
e.g. monthly or quarterly
form of the repayment (e.g. amortised or interestonly loan)
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establishment fee
service fee
commitment fee
line fee
bill option clause fee
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Loan Covenants
Negative covenant
Restricts the activities and financial
structure of borrower; e.g. maximum D/E
ratio, minimum working-capital ratio,
unaudited periodic financial statements
Breach of covenant results in default of the loan
contract, entitling lender to act
Penalty payments
Call entire loan due
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R
[
1 (1 i )n
]
i
where :
R the instalmentamount
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pmt
k
m
n*m
k
1 1
m
Pva *
Where:
pmt is the payment
k is the interest rate charged
Pva is the amount borrowed (present value)
n number of years
m is the frequency that payments (pmt) are to be
made
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1 (1 i )n
[
]
i
A $150 000
0.08
0.006667
12
n 5 years 12 months 60
$150 000
R
1 (1 0.006667)60
[
]
0.006667
R $3041.49 per month
i
56
1 (1 i )n
[
](1 i )
i
57
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57.21494
$375.78 monthly instalment
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60
20
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R
[
1 (1 i )n
]
i
k
m
pmt
n*m
k
1 1
m
Pva *
63
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65
66
22
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MBS
68
69
23
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(cont.)
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Debentures etc
Debentures:
are secured by either a fixed or floating charge
over the issuers unpledged assets
are listed and traded on the stock exchange
have a higher claim over a companys assets
(e.g. on liquidation) than unsecured note
holders
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Debentures
Usually issued at face value, but may be
issued at a discount or with deferred or zero
interest
A prospectus contains detailed information
about the business
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75
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P C[
1 (1 i )n
] A(1 i )n
i
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Alternative formula
n*m
k
1 1
pmt m
Fv
price
*
n*m
k
m
k
1
Where:
Pmt is the annual payment
m frequency of payments
k yield
n number of years
Fv future value (par value or face value)
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1 (1 i )n
n
k
P C
A(1 i ) (1 i )
i
80
81
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84
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86
87
29
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88
30