Course 1 Flashcards
What is debt financing?
Is the act of borrowing a money that we call the principal loan from the issuer over a duration of time.
The issuer are mostly banks and the borrowers are called creditors.
Most big company go to this type of financing to protect stakes (parts) of the company.
What is the main difference between an amortized loan and a bullet loan?
Bullet loan: Pricipal is paid at the end of maturity date but interest rate are paid over a duration of time
Amortized loan: Interest rate + Amortized principal are paid during a period of time monthly.
Explain dif between: Short term debpt vs Longterm debpt
Short term debpt: Is a debt that fund the everyday capital such as wages, purchasing inventories, cost of maintenance.
Long term debpt: Is a debpt that funds long term investment such as: buildings, equipments, assets.
what’s a collateral?
It’sa guarrenty for the lander. It reassures them that the loan that they landed to the borrower can be regain.
The secured loan are such as: inventoy, real estate, equipement.
Wha’ts a covenant?
It’s a contract between the lander and borrower.
Benefits for the lander: The lander can put some restrictions to the borrower to decrease risk for the lander.
Benefits for the borrower. They can impose the interest rate (mostly lower interest rate).
What can a lender do if a debt covenant is violated?
- Demand penalty payment ;
- Increase the interest rate ;
- Increase the amount of collateral ;
- Demand full immediate repayment of the loan.
Whats a debt seniorty and what are the priority of payments
In case of a bankrupsy, the company has to payback borrowers by order of priority:
- 1st: Holders of senior bonds
- 2nd: Holders of subordinated debt
- Last: Shareholders
What’s a bond?
A bond it’s a loan issued by the borrower and bought the lender (bonholder). In exchange the the issuer has to give coupons over a duration of time until the maturity date. At maturity date the bondholders receive the principal + plus the last coupon.
Issuers are the borrowers because they sell bond: Company, gouverment, municipal.
The lenders are the investors.
What is the charistic or Description of a bond?
- Face value or Par Value: the original value of a share, bond, etc. The nominal amount is used to calculate the coupon Bond.
- Coupon Rate: The rate of interest the bond issuer will pay on the face value of the bond, expressed as a percentage.
- Coupon Dates: The dates on which the bond issuer will make interest payments.
- Coupon type: Fix coupon or floating coupons, etc..
- Maturity Date: The date on which the bond will mature and the bond issuer will pay the bondholder the face value of the bond.
Bond holder vs Stock holders
Bondholder:
- making a investment the investor becomes a creditor of a corporation (or government) ;
- He will coupons ;
- He remains bond holder until the maturity of it’s bond.
Stock holder:
- making an equity investment the investor becomes a part owner of a corporation.
- He has voting rights and will receive dividends.
- He remains stock holder until he sells his stock
What are the three type of US Treasury securities? what are their characteristics?
- Treasury Bills (short term debpt obligation): Issued ranging from few days to 52 weeks.
- Treasury Notes (medium term debpt obligation): Issues ranging from 2,3,5 to 7 years.
- Treasury bonds (Longterm debpt obligation): Issues ranging from 20 to 30 years.
How to calcule the T-Bill interest rate?
Formula:
d = (1-p)*(360/Nsm)
legend:
p = settlement price (the price at maturity date)
Nsm = difference betwwen the sttlement date and maturity date
d = interrest rate (in%) or yield on discount basis
what is the typical frequency of coupon payment from the seller to the buyer in the US?
6 months
Dif between clean price and dirty price. And how to find the dirty price.
. Clean price = The price of the bond excluding any accrued interest.
. Dirty Price = Clean price + Accrued interrest (refers to build-up interest between coupon payment dates).
How to calculate Present value?
Pv = Fv/(1+r)^n
Pv = Present value
Fv = Future value
r = interest rate
n = number of periods
