Introduction to Finance

Prepared By:
Dr. H. M. Mosarof Hossain
Professor
Department of Finance
University of Dhaka
mosarof@du.ac.bd

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 Chapter Four: Intermediate Term Financing

Definition:
Required amount of fund collected by a business enterprise
for meeting up fund requirement for acquiring important
useable items and making investment from different
available sources for more than one year but less than 10
years time period is known as intermediate term financing.

Features of intermediate term financing:

Maturity Size of loan
Users of loan Objective of credit
Sources Repayment method
Security Cost of financing

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 Types of Intermediate Term Financing

(a) Bank loan

(b) Loans from nonbank financial institutions
(c) Equipment financing
(d) Lease financing

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 Cost of Intermediate Term Financing

A company needs Tk.30 lac to finance a capital

expenditure. Initially the company arranged for a
revolving credit agreement with Sonali Bank Ltd
for 3 years on the condition that the agreement
may be converted into another 3 year term loan at
the expiration of revolving credit agreement. The
bank charges 2% interest over the prime rate for
revolving credit and 3% interest rate over prime
rate for term loan. The commitment fee for both
loans is 1%. The company plans to borrow Tk.14
lac at the beginning and Tk.10 lac at the end of
the first year.
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 Cost of Intermediate Term Financing

At the expiration of the revolving credit

agreement, the company plans to take full
amount of loan. At the end of 4th, 5th and 6th year
the company plans to repay Tk.10 lac with prime
rate of 9%. Calculate the effective interest rate
for revolving credit as well as for term loan.

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 Cost of Intermediate Term Financing
Cost of revolving credit

Items/Year 1 2 3
Used loan amount Tk.1400000 Tk.2400000 Tk.2400000

Unused loan amount Tk.1600000 Tk.600000 Tk.600000

Interest on used loan amount (11%) 154000 264000 264000

Commitment fee on unused amount 16000 6000 6000

Total cost 160000 270000 270000

Effective interest rate 12.14% 11.25% 11.25%

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 Cost of Intermediate Term Financing
Cost of term loan

Items/Year 4 5 6

Used loan amount Tk.3000000 Tk.2000000 Tk.1000000

Unused loan amount 0 1000000 2000000

Interest on used loan amount 360000 240000 120000
(12%)
Commitment fee on unused 0 10000 20000
amount
Total cost 360000 250000 140000
Effective interest rate 12% 12.5% 14%

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 Methods of Repayment of Term loan

(a) Balloon method: Loan principal Tk.50 lac, interest

rate 15% and loan period 5 years.

Period Beginning Interest Principal Total Ending

balance payment payment payment balance
1 5000000 750000 1000000 1750000 4000000
2 4000000 600000 1000000 1600000 3000000
3 3000000 450000 1000000 1450000 2000000
4 2000000 300000 1000000 1300000 1000000

5 1000000 150000 1000000 1150000 0

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 Methods of Repayment of Term loan

(b) Capital recovery method: Loan principal Tk.50 lac,

interest rate 15% and loan period 5 years. By applying
annuity formula, the calculated amount of periodic
repayment is Tk.1491650

Period Beginning Loan Interest Principal Ending

balance repayment payment payment balance
1 5000000 1491650 750000 741650 4258350
2 4258350 1491650 638753 852897 3405453
3 3405453 1491650 510818 980832 2424621
4 2424621 1491650 363693 1127957 1296664

5 1296664 1491650 194986 1296664 0