BUSINESS MANAGEMENT

By Widiananda Prabowo
Magister Management Universitas Brawijaya 2019/2020

Matrikulasi Kelas DB

1. Q : When would a firm obtain a floating-rate loan rather than a fixed-rate loan?

A : Depending on the terms of the loan, it could change as often as monthly. A

floating-rate loan can result in a lower payment in the short-term but carries a risk
that the rate could rise during the long-term and produce significantly higher
payments. If the company do not expect to keep the loan for a long time, then a
floating-rate may be the better choice. In addition, a floating-rate loan can allow the
company to borrow a larger amount of money if the credit is less than perfect. The
downside to this is that if the interest rate rises, it may not be able to meet
company’s payment obligation. It is because the primary advantage of a
floating interest rate is that it moves with the market rates, but also this can be a
disadvantage, depending on which way the market rates move and which side of
the transaction the company is on. A rise in market rates can increase the cost of
the loan for the company and increase the interest income for the lender.
Conversely, a fall in market rates can decrease the cost of the loan for the company
and decrease the interest income for the lender.

2. Q : When a firm plans to issue bonds, what legal document is created by the firm,
and what is included in this document?

A : When a firm plans to issue bonds, it creates an indenture. Between bond issuers
and bondholders, an indenture is a legal and binding contract specifying all the
important features of a bond, such as its maturity date, the timing of interest
payments, method of interest calculation and callable or convertible features, if
applicable. The bond indenture also contains all the terms and conditions applicable
to the bond issue. Other critical information included in the indenture is the financial
covenants that govern the issuer and the formulas for calculating whether the issuer
is within the covenants. Should a conflict arise between the issuer and bondholder,
the indenture is the reference document utilized for conflict resolution. As a result,
the indenture contains all the minutiae of the bond issue. In the fixed-income
market, an indenture is hardly ever referred to when times are normal. But the
indenture becomes the go-to document when certain events take place, such as if
the issuer is in danger of violating a bond covenant. The indenture is then scrutinized
closely to make sure there is no ambiguity in calculating the financial ratios that
determine whether the issuer is abiding by the covenants. The indenture is another
name for the bond contract terms, which are also referred to as a deed of trust. An
indenture trustee handles fiduciary duties related to investments. These
 professionals monitor interest payments, redemptions, and investor
communications, and they lead trust departments at institutions. Essentially, their
role is to oversee and administer security-backed indentures issued by a company.

3. Q : Why might a creditor prefer informal remedies to formal remedies in the event
of a business failure?

A : An informal debt agreement/informal remedies is an arrangement between a

debtor and a creditor where debtor has to pay what he owes to the creditor as per
the agreed terms. This is different from a formal debt agreement because there is no
legal binding in this arrangement between two parties and it does not have any
impact on the credit score of the debtor. A debt counsellor or manager is usually
involved to settle the terms and make the arrangement beneficial for both the
parties. As like any other arrangement, informal debt agreement also comes with
certain advantages and disadvantages. An informal agreement will typically be
accomplished more quickly than formal bankruptcy proceedings and is less
expensive as it avoids excessive legal fees. That’s why most of the creditors will
prefer informal debt agreement than formal agreement. The biggest advantage of an
informal debt agreement to the debtor is that it does not have any impact on their
credit score of the debtor and this won’t affect their credit history. In informal debt
agreement gives the opportunity to the debtor to negotiate a reduction in payment
amount. They can pay a lump sum lower amount than they owe. Creditor can accept
this if the sum the debtor is willing to pay would sufficiently pay enough off the debt.
This is of great benefit to the debtor as he gets enough time to pay off lower some of
debt so he can make budget and plan accordingly. The debtor can get an extension in
the agreed time in which they have to pay the sum they owe, if they feel that the
time allowed is not sufficient for them to pay off the sum in whole. There is also a
possibility of negotiating a lower interest rate if the debtor is unable to make the
debt payments. Informal debt agreement also comes with the option in which the
debtor can negotiate to get a waiver on the debt for a certain period of time. This
will help them arrange for the money. The debtor isn’t forced to tell anyone about
his debt like in certain forms of legal binding agreements or like in bankruptcy. This
can not have any impact on credit score and the debtor won’t be listed in the
National Personal Insolvency Index as well. The biggest drawback of informal debt
agreement lies with the fact that these are not protected by any legislation or by any
court order. This is solely dependent on the willingness of both the parties. These
arrangements will be of no value if any of the party is not wiling to stick to the terms
of agreement. Informal debt agreements are largely dependent on creditor’s
goodwill as they can cancel the agreement any time. However, why would the
creditor cancel the arrangement if the debtor is following the terms agreed.