International Debt and Capital Markets

Question 1

What is Debt Finance?

Answer 1

Debt finance is the purchase of the debt instruments that must eventually be repaid for the purpose of raising capital.

Question 2

What is a Bond?

Answer 2

A fixed or variable income security that represents a debt obligation between two parties.

Question 3

What is a Loan?

Answer 3

A debt instrument wherein a lender transfers a sum of captial to a borrower who must then repay the sum, with interest, either in installements or in full on maturity.

Question 4

What types of Funding Needs do Borrowers Have?

Answer 4

1. Working Capital.
2. Capital Expenditure.

Question 5

What is Capital Expenditure?

Answer 5

Capital used to acquire, maintain, or upgrade fixed assets.

Question 6

How is Capital Expentiure usually Funded?

Answer 6

Through medium-term and long-term debt.

Question 7

What is Working Capital?

Answer 7

Capital needed to fund day-to-day operations.

Question 8

How is Working Capital usually funded?

Answer 8

Through short-term debt.

Question 9

In Debt Finance, why do sophisticated borrowers utilize various forms of financing?

Answer 9

1. To obtain funds at the most competitive prices.
2. To diversify one’s sources of funding.

Question 10

What is a Eurocurrency?

Answer 10

A currency owned by a person who is not a resident of the country which issued that currency.

Question 11

When does a Currency become a Eurocurrency?

Answer 11

When it comes into the possession of a non-resident of the currency’s country of denomination.

Question 12

What is a Eurobond?

Answer 12

A debt instrument that is denominated in a currency foreign to the one of its country or market of issuance.

Question 13

What are the most common forms of Debt Financing?

Answer 13

1. Loans.
2. Bonds.
3. Derivatives.

Question 14

What are the main types of Medium-Term and Long-Term Debt?

Answer 14

1. Loans.
2. Medium-to-long-term Bonds.

Question 15

What is a Revolving Credit Facility?

Answer 15

A line of credit issued by a bank to a borrower from which the latter can cyclically spend and pay down. Not repayable on demand.

See: The Companion, P.13.

Question 16

What is a Foreign Issue in a Domestic Capital Market (FIDCM)?

Answer 16

Domestic currency issuances by foreign issuers that are exclusively sold in the domestic capital market.

Question 17

How are Eurobonds distinguished from FIDCMs?

Answer 17

The latter limits itself to a single domestic market, while the former does not.

Question 18

What is Collateral?

Answer 18

A pledge of security, usually an asset or guarantee, that is provided to the lender as risk compensation.

Question 19

What are the main types of Short-Term (12-Month) Debt?

Answer 19

1. Revolving Credit.
2. Acceptance Credit.
3. Commercial Paper.
4. Overdraft.

Question 20

What are the Five Types of Risk?

Answer 20

1. Legal Risk.
2. Operations Risk.
3. Liquidity Risk.
4. Credit Risk.
5. Market Risk.

Question 21

What is Credit Risk?

Answer 21

The risk attached to a borrower’s ability to repay its debt.

Question 22

What does Credit Risk influence?

Answer 22

1. Cost of Debt.
2. Terms & Conditions.
3. Finanical Assistance.

Question 23

How does Time influence Credit Risk?

Answer 23

Time non-linearly increases credit risk.

Question 24

What is Market Risk?

Answer 24

The risk attacthed to market volatility, whether in the form of stock price, interest rate, or other metric fluctuations.

Question 25

What is Legal Risk?

Answer 25

The risk attached to the legal exposure a transaction might leave a lender with.

Question 26

What does Legal Risk encompass?

Answer 26

1. Legal Misunderstanding.
2. Legal Incapacity.
3. Regulatory Incapacity.
4. Human Error.

Question 27

What is Operational Risk, i.e. Settlement Risk?

Answer 27

The risk attached to systemic, procedural, or managerial inadequacy and human error.

Question 28

What is Liquidity Risk?

Answer 28

The risk attached to a borrower’s inability to repay its debt in a timely manner due to illiquidity of assets.