Topic 7– Short-term and Medium-to-Long Term Debt Financing Flashcards Preview

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Flashcards in Topic 7– Short-term and Medium-to-Long Term Debt Financing Deck (57)
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1

Short Term Debt

A debt financing arrangement for a period of less than one year

2

Short-term debt is used to finance

- working capital requirements
- liquidity needs or cash-flow mismatches
- inventory/stock

3

The short-term finance sources of funds used by business studied in this unit are

bank overdrafts
commercial bills
promissory notes
certificates of deposit

4

Bank overdrafts

- allows a firm to place its operating account into deficit (overdraft);
- limit is negotiated with the bank;
- limit and interest charged will depend on the credit standing and relationship the firm has with its bank

5

Operating Account

A cheque account through which a firm conducts its day to day financial transactions

6

Overdrafts interest charge

- interest is charged on the debit balance, at a margin above a ‘reference’ rate.

for example: reference rate may be the bank’s published ‘prime rate’ or BBSW

7

margin

the interest charge above a specified reference interest rate that reflects the credit risk of the borrower

8

Prime rate

a reference interest rate set by a financial institution for the purpose of pricing certain variable rate loans

9

The reference rate a bank might use

is the prime rate or published market rate such as BBSW

10

Overdraft fees include

establishment, account service, unused limit

11

Commercial bills

provide funding for non-specific business transactions

12

Bill of Exchange

is a binding agreement by one party to pay a fixed amount of cash to another party as of a predetermined date or on demand.

13

Two types of bills of exchange

Commercial Bills
Trade Bills

14

Trade Bills

A bill of exchange issues to finance a specific international trade transaction

15

3 types of commercial bills

Bank Accepted bills
Bank Endorsed bills
Non-Bank bills

16

A bank-accepted bill

bill that is issued by a corporation and incorporates the name of a bank as acceptor

17

Parties to a Bill of Exchange

Drawer
Acceptor
Payee/Endorser
Discounter

18

Drawer

- the issuer of the bill.
- has a secondary liability for repayment of the bill at maturity date.

19

Acceptor

- a bank that puts its name on the face of a bill and takes primary liability to repay the holder at maturity

- the bank acceptor improves the credit status of the bill.
- acceptor charges the drawer a fee.

20

Payee

The party who receives the the funds when a bill of exchange is initially discounted

-Usually the drawer, but the drawer can specify some other party as payee.

21

Discounter

The party that purchases a bill of exchange; the provider of funds

- May also be the acceptor of the bill.
- Purchases bill at less than the face value.
- Subsequent discounters may purchase existing bills in the secondary market.

22

Endorser

The party that signs the reverse of a bill, creates legal chain of ownerships

- The party that was previously a holder of the bill.
-Order of liability for payment of the bill runs from acceptor to drawer and then to endorser.

23

Steps of a Bank Accepted Bill

- issued today by the drawer, face value only repayable at the maturity date.
- on the issue date, the payee receives the discounted amount.
- the difference between the discounted amount and the face value is the yield.
- at maturity date the holder of the bill will receive the face value of the bill from the acceptor [bank].
- the acceptor will, at the same time, recover its funds from the drawer under a separate related agreement.

24

Promissory Notes

Discount securities issued by corporations without an acceptor or endorsement

Generally referred to in the markets as commercial paper

25

Negotiable Certificates of Deposit

Is a short term discount security, issued by a bank, typically with an initial term to maturity of up to 180 days

26

Types of medium to longer term finance

term loans
mortgage finance
corporate bonds (debentures and unsecured notes)
lease finance

27

Term Loan

A loan advanced for a specific period, usually for a known purpose; fixed or variable interest rate

28

Use of Term Loans

typically used to finance capital expenditure (e.g. buildings, equipment)

29

Time frame for Fixed Term loans

from 3 to 15 years

30

3 term loan repayment types

Interest Only
Amortised Loan
Deferred repayment loan