Chapter 5 Flashcards
What is debt finance?
Loan of funds to a business without confering ownership rights
Features of debt finance
Interest paid out of pre tax profits
Paying interest reduces the taxable profits
Carries a risk of default if payments not met
Security/covenants used
What is a fixed charge?
Debt secured against a specific asset, normally land or buildings
What is a floating charge?
Debt secured against the general assets of the business
What are covenants?
Specific requirements or limitations laid down as a condition of taking on debt financing
What are traded debt/bonds?
Quoted companies can issue bonds to investors in the stock market
What determines the choice between bonds or bank borrowings?
Liquidity
Timescale
Costs
What are bonds and debentures?
Types of traded debt and are traded on a bond market
What are redeemable bonds?
Bought back by the company on maturity
What are convertible bonds?
Bond holder can choose whether to have bonds bought back or to convert to shares
What are deep discount bonds?
Bonds issued at significant discaount and have low coupon rate
What are zero coupon bonds?
Coupon rate is zero so no annual interest is paid.
Profit made on redemption
What is interest rate risk?
Risk of gains or losses on assets and liabilities due to changes in interest rates
What is refinancing risk?
Risk that borrowings will not be refinanced or will not be refinanced at same rates
What is currency risk?
Risk that arises from possible future movements in an exchange rate
