Chapter 7

Question 1

Bullet Loan

Answer 1

Only interest is paid during Lon period. Principle is paid back in full at end of period

Question 2

Balloon Loan

Answer 2

A chunk of the loan and interest is paid during the loan period and then the remainder is paid back at the end

Question 3

Amortising loan

Answer 3

Principle and interest is steadily paid back over the loan period

Question 4

Hardcore overdraft

Answer 4

An overdraft that has become so essential to the business that it’s now a permanent part of their financing

Question 5

Covenants

Answer 5

Obligations or restrictions placed on the lendee by the lender organisation. E.g. cannot take any other loans from other organisations

Question 6

Sale and leaseback

Answer 6

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

Question 7

Factoring

Answer 7

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

Question 8

Factoring with recourse

Answer 8

When the factoring company passes any bad debts back to the customer company.

Question 9

Invoice discounting

Answer 9

When a business sells select invoices to a factoring company which exchanges the debt for immediate cash (for a fee).

Question 10

Downsides of factoring.

Answer 10

• 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

Question 11

floating charge

Answer 11

A class of assets (non-current) which a bank can insist to seize and sell should the lendee default on their loan

Question 12

Personal guarantee

Answer 12

A person who becomes personably liable should a business default

Question 13

Loan-to-value ratio

Answer 13

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

Question 14

Rights issue

Answer 14

An offer to existing shareholders to buy more shares, usually at a lower than market value rate

Question 15

Preference Share

Answer 15

A share that bears the right to a dividend

Question 16

Benefits of preference shares to a company for raising finance

Answer 16

• share holders do not have voting right
• shares are not secured on assets
• Dividends do not have to be paid during a loss

Question 17

Disadvantages of preference shares to companies for raising finance

Answer 17

• shares are paid after tax whereas loan interest is paid before tax and is tax deductible

Question 18

Another term for business loan stock

Answer 18

Corporate bonds

Question 19

Bond

Answer 19

A fixed term interest security offered by governments or businesses

Question 20

Financial gearing

Answer 20

The ratio between debt financing and equity financing of a business

Question 21

high geared company

Answer 21

if debt finance to equity ratio is high

Question 22

Prior charge capital

Answer 22

Any capital that has priority to payment over ordinary share capital, i.e. preference shares or debt repayment

Question 23

Gearing formula

Answer 23

Non-current liabilities /

Non-current liabilities + equity

Question 24

Two ways of measuring financial risk

Answer 24

1. Gearing ratio
2. Interest cover

Question 25

Interest cover ratio

Answer 25

operating profit / finance costs

Question 26

Two main types of banks

Answer 26

Primary: Retail/commercial banks

Secondary: do not take part in clearing system

Question 27

Another term for face value (of a coupon)

Answer 27

Par value, nominal value, par amount

Question 28

Financial Intermediation

Answer 28

How a bank uses customer’s deposits to offer loans to other customers

Question 29

Types of assets a bank has (6 types)

Answer 29

1. Physical cash
2. Balances with BoE
3. Bills (treasury bills; low-risk short-term loans
4. Loans to customers
5. Loans to money markets or other banks
6. Securities

Question 30

4 types of relationships that take place at a bank

Answer 30

1. Debtor/creditor (receivable/payable)
2. The bailor/bailee
3. The Principal/agent
4. The mortgagor/mortgagee

Question 31

Summarise the bailor/bailee relationship

Answer 31

Banks store customer’s previous items in its vault

Question 32

Facility letter

Answer 32

A legal document that outlines the rights and duties of a bank and its customer of either a loan or overdraft

Question 33

Simple interest

Answer 33

Interest charged on the full initial principal. The amount of interest does not change despite the principal decreasing

Flat rate interest.

Question 34

Fixed rate interest

Answer 34

A rate of interest that remains constant on the changing amount of principal

Question 35

Compound interest

Answer 35

Interest is charged on the loan principal plus unpaid accumulated interest

Question 36

Dividend yield per share formula

Answer 36

annual dividend per share

/

market price per share

Question 38

What is a coupon?

Answer 38

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

Question 39

Coupon rate

Answer 39

Annual coupon payment / nominal value of bond x 100%

Question 40

Current yield of a coupon formula

Answer 40

Annual Coupon payment / market value of bond x 100%

Question 41

What relation does a coupon have to a bond?

Answer 41

A coupon is the interest payment from a bond (if it offers coupons)