International Debt and Capital Markets Flashcards
What is Debt Finance?
Debt finance is the purchase of the debt instruments that must eventually be repaid for the purpose of raising capital.
What is a Bond?
A fixed or variable income security that represents a debt obligation between two parties.
What is a Loan?
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.
What types of Funding Needs do Borrowers Have?
- Working Capital.
- Capital Expenditure.
What is Capital Expenditure?
Capital used to acquire, maintain, or upgrade fixed assets.
How is Capital Expentiure usually Funded?
Through medium-term and long-term debt.
What is Working Capital?
Capital needed to fund day-to-day operations.
How is Working Capital usually funded?
Through short-term debt.
In Debt Finance, why do sophisticated borrowers utilize various forms of financing?
- To obtain funds at the most competitive prices.
- To diversify one’s sources of funding.
What is a Eurocurrency?
A currency owned by a person who is not a resident of the country which issued that currency.
When does a Currency become a Eurocurrency?
When it comes into the possession of a non-resident of the currency’s country of denomination.
What is a Eurobond?
A debt instrument that is denominated in a currency foreign to the one of its country or market of issuance.
What are the most common forms of Debt Financing?
- Loans.
- Bonds.
- Derivatives.
What are the main types of Medium-Term and Long-Term Debt?
- Loans.
- Medium-to-long-term Bonds.
What is a Revolving Credit Facility?
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.
What is a Foreign Issue in a Domestic Capital Market (FIDCM)?
Domestic currency issuances by foreign issuers that are exclusively sold in the domestic capital market.
How are Eurobonds distinguished from FIDCMs?
The latter limits itself to a single domestic market, while the former does not.
What is Collateral?
A pledge of security, usually an asset or guarantee, that is provided to the lender as risk compensation.
What are the main types of Short-Term (12-Month) Debt?
- Revolving Credit.
- Acceptance Credit.
- Commercial Paper.
- Overdraft.
What are the Five Types of Risk?
- Legal Risk.
- Operations Risk.
- Liquidity Risk.
- Credit Risk.
- Market Risk.
What is Credit Risk?
The risk attached to a borrower’s ability to repay its debt.
What does Credit Risk influence?
- Cost of Debt.
- Terms & Conditions.
- Finanical Assistance.
How does Time influence Credit Risk?
Time non-linearly increases credit risk.
What is Market Risk?
The risk attacthed to market volatility, whether in the form of stock price, interest rate, or other metric fluctuations.
What is Legal Risk?
The risk attached to the legal exposure a transaction might leave a lender with.
What does Legal Risk encompass?
- Legal Misunderstanding.
- Legal Incapacity.
- Regulatory Incapacity.
- Human Error.
What is Operational Risk, i.e. Settlement Risk?
The risk attached to systemic, procedural, or managerial inadequacy and human error.
What is Liquidity Risk?
The risk attached to a borrower’s inability to repay its debt in a timely manner due to illiquidity of assets.
