Flashcards in Topic 7– Short-term and Medium-to-Long Term Debt Financing Deck (57)
Short Term Debt
A debt financing arrangement for a period of less than one year
Short-term debt is used to finance
- working capital requirements
- liquidity needs or cash-flow mismatches
The short-term finance sources of funds used by business studied in this unit are
certificates of deposit
- 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
A cheque account through which a firm conducts its day to day financial transactions
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
the interest charge above a specified reference interest rate that reflects the credit risk of the borrower
a reference interest rate set by a financial institution for the purpose of pricing certain variable rate loans
The reference rate a bank might use
is the prime rate or published market rate such as BBSW
Overdraft fees include
establishment, account service, unused limit
provide funding for non-specific business transactions
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.
Two types of bills of exchange
A bill of exchange issues to finance a specific international trade transaction
3 types of commercial bills
Bank Accepted bills
Bank Endorsed bills
A bank-accepted bill
bill that is issued by a corporation and incorporates the name of a bank as acceptor
Parties to a Bill of Exchange
- the issuer of the bill.
- has a secondary liability for repayment of the bill at maturity date.
- 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.
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.
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.
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.
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.
Discount securities issued by corporations without an acceptor or endorsement
Generally referred to in the markets as commercial paper
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
Types of medium to longer term finance
corporate bonds (debentures and unsecured notes)
A loan advanced for a specific period, usually for a known purpose; fixed or variable interest rate
Use of Term Loans
typically used to finance capital expenditure (e.g. buildings, equipment)
Time frame for Fixed Term loans
from 3 to 15 years