Chapter 7 Flashcards
Bullet Loan
Only interest is paid during Lon period. Principle is paid back in full at end of period
Balloon Loan
A chunk of the loan and interest is paid during the loan period and then the remainder is paid back at the end
Amortising loan
Principle and interest is steadily paid back over the loan period
Hardcore overdraft
An overdraft that has become so essential to the business that it’s now a permanent part of their financing
Covenants
Obligations or restrictions placed on the lendee by the lender organisation. E.g. cannot take any other loans from other organisations
Sale and leaseback
When an organisation sells an asset to a financial institution and then leases back. Gets immediate cash boost and keeps the use of the asset
Factoring
When a factoring company gives (usually) 80% of a customer’s AR balance in cash in exchange for the whole debt. The factoring company collects the debt on behalf of the company.
Or, the factoring company maintains the sales ledger for a fee
Factoring with recourse
When the factoring company passes any bad debts back to the customer company.
Invoice discounting
When a business sells select invoices to a factoring company which exchanges the debt for immediate cash (for a fee).
Downsides of factoring.
- may be a sign of poor standards at a company: damage reputation
- May damage relationship with customer and company as there’s a barrier now
- May cause issues with previous AR staff and become redundant
floating charge
A class of assets (non-current) which a bank can insist to seize and sell should the lendee default on their loan
Personal guarantee
A person who becomes personably liable should a business default
Loan-to-value ratio
The ratio of the loan in proportion to the value of the asset that it is being used for.
I.e. someone taking a mortgage of £100k for a £200k house would be 1:2
Rights issue
An offer to existing shareholders to buy more shares, usually at a lower than market value rate
Preference Share
A share that bears the right to a dividend
Benefits of preference shares to a company for raising finance
- share holders do not have voting right
- shares are not secured on assets
- Dividends do not have to be paid during a loss
Disadvantages of preference shares to companies for raising finance
- shares are paid after tax whereas loan interest is paid before tax and is tax deductible
Another term for business loan stock
Corporate bonds
Bond
A fixed term interest security offered by governments or businesses
Financial gearing
The ratio between debt financing and equity financing of a business
high geared company
if debt finance to equity ratio is high
Prior charge capital
Any capital that has priority to payment over ordinary share capital, i.e. preference shares or debt repayment
Gearing formula
Non-current liabilities /
Non-current liabilities + equity
Two ways of measuring financial risk
- Gearing ratio
- Interest cover
Interest cover ratio
operating profit / finance costs
Two main types of banks
Primary: Retail/commercial banks
Secondary: do not take part in clearing system
Another term for face value (of a coupon)
Par value, nominal value, par amount
Financial Intermediation
How a bank uses customer’s deposits to offer loans to other customers
Types of assets a bank has (6 types)
- Physical cash
- Balances with BoE
- Bills (treasury bills; low-risk short-term loans
- Loans to customers
- Loans to money markets or other banks
- Securities
4 types of relationships that take place at a bank
- Debtor/creditor (receivable/payable)
- The bailor/bailee
- The Principal/agent
- The mortgagor/mortgagee
Summarise the bailor/bailee relationship
Banks store customer’s previous items in its vault
Facility letter
A legal document that outlines the rights and duties of a bank and its customer of either a loan or overdraft
Simple interest
Interest charged on the full initial principal. The amount of interest does not change despite the principal decreasing
Flat rate interest.
Fixed rate interest
A rate of interest that remains constant on the changing amount of principal
Compound interest
Interest is charged on the loan principal plus unpaid accumulated interest
Dividend yield per share formula
annual dividend per share
/
market price per share
What is a coupon?
A bond that gives a predictable fixed interest payment a bond holder receives every bond period and has a final maturity value.
5% on £1,000 would be £50 every year paid to the bond holder
Coupon rate
Annual coupon payment / nominal value of bond x 100%
Current yield of a coupon formula
Annual Coupon payment / market value of bond x 100%
What relation does a coupon have to a bond?
A coupon is the interest payment from a bond (if it offers coupons)
