Chap 2 - Wordy!

Question 1

Overdraft

Answer 1

Pay interest on negative balance

Helps manage cash flows

Question 2

Trade credit

Answer 2

Late payment for goods

Helps with cash flows

Question 3

Factoring

Answer 3

Receive payments for goods from factor - quicker than waiting for customers
Receive less from factor than the customer pays

Question 4

Bills of exchange

Answer 4

Pay for goods using bill of exchange if don’t have cash
Agree to pay at certain date - more than original amount
Backed up by bank

Question 5

Commercial paper

Answer 5

Bill of exchange for large companies - don’t need backing from bank

Question 6

Hire purchase

Answer 6

Hire asset with regular payments

Own asset at end of term

Question 7

Credit sale

Answer 7

Buy now pay back in regular instalments for set period

Question 8

Lease

Answer 8

Use asset - pay regular, never own

Question 9

Bank loan

Answer 9

Repay throughout

Question 10

Interest only loan

Answer 10

Receive lump sum
Pay back interest
Pay lump sum at end

Question 11

Ordinary shares

Answer 11

Risky
High variability in returns
High marketability 
Voting rights
Dividends - not guaranteed - received after pay debts and preference shares

Question 12

Preference shares

Answer 12

No voting rights - unless not paid etc

Dividends paid after debt owners before ordinary - usually fixed

Question 13

Convertibles

Answer 13

Preference share or unsecured loan with option to convert to ordinary share

Question 14

Debentures

Answer 14

Secured loan - against asset
If company don’t pay - assets can be seized for rent
Floating charge debenture- no specific asset

Question 15

Unsecured loan stock

Answer 15

Coupon not paid - can sue

Rank below debenture holders

Question 16

Eurobonds

Answer 16

Issued by large companies and gov in another currency

Variable rate - floating rate

Question 17

Government borrowing

Answer 17

Gilts - long term, secure, marketable large issue

Can be index linked

Question 18

Cash on deposit

Answer 18

Cash earning interest in a bank account

Question 19

Government - Bills of exchange

Answer 19

Short term
Sold below par
Redeemed at par
Secure
Marketable 
Low return

Question 20

Certificate of deposit

Answer 20

Issued by bank

Large deposit for fixed term

Question 21

Collective investment schemes

Answer 21

Invest to achieve spread of investments

Question 22

Primary market

Answer 22

Long term

Issue own bond

Question 23

Secondary market

Answer 23

Second hand bond/share

Question 24

Debt vs equity finance

Answer 24

Debt - cheaper
Not taxable - seen as business expense
Equity - dividends included in tax calcs

Debt - greater risk