Finance final Flashcards
Advantages and disadvantages of issuing a commercial paper
Advantages:
Lower borrowing costs compared to bank loans.
No need for collateral (unsecured).
Flexible terms, typically short-term.
Disadvantages:
Limited to high-credit-rating firms.
Relies heavily on investor confidence.
Cannot be used for long-term financing needs.
Cost of giving up cash discount
The effective annual interest rate a buyer pays by not taking advantage of a discount offered for early payment.
Line of credit (defenition + why useful)
A pre-approved loan limit that a company can draw upon as needed.
Benefits: Flexibility and easy access to funds.
Annual cleanup
A requirement that the borrower repays the full amount owed for a short period, demonstrating financial discipline and reducing lender risk.
Factoring (definition + difference between with and without recourse)
Selling accounts receivable to a third party (factor) for immediate cash.
With Recourse: The seller is responsible for unpaid invoices.
Without Recourse: The factor absorbs the risk of non-payment.
Bond
A fixed-income instrument representing a loan made by an investor.
Coupon
Interest paid periodically.
Face/par/nominal value
The amount repaid at maturity.
Convertible bonds
Can be converted into equity.
Floating rate bonds
Have variable interest rates.
TIPS
Treasury Inflation-Protected Securities.
Indenture
The bond contract.
Zero coupon bonds
No periodic interest; sold at a discount.
Callable bonds
Can be redeemed by the issuer before maturity.
Puttable bonds
Can be sold back by the investor before maturity.
