Long-Term Funds Flashcards
- These are money that a company uses to support its operations and growth over a longer period (more than one year).
- Companies can use these by taking out long-term loans or selling shares of their stock.
- These funds can be borrowed from banks or other financial institutions.
Long-Term Funds
What are long term funds usually used for?
- expanding the business
Long-term - buying new equipment funds
- improving facilities
- paying off large debts.
What are the 5 sources of Long-term Funds?
- Universal Bank
- Commercial Bank
- Thrift Bank
- Government Bank
- Investment Bank
Sources of Long-Term Funds
This offers a wide range of services like a commercial bank, plus investment services and the ability to invest in non-related businesses.
example: BDO
Universal Bank
Sources of Long-Term Funds
This is similar to universal bank but with fewer investment options; focuses on deposits, loans and other standard banking services.
example: Philippine National Bank (PNB)
Commercial Bank
Sources of Long-Term Funds
Focuses on savings and loans, providing financial support mainly to small and medium enterprises (SMEs) and individuals, including short-term and long-term financing
example: BPI Family Savings Bank
Thrift Bank
Sources of Long-Term Funds
Owned and controlled by the government, these banks are aimed at supporting economic development in the country.
example: Landbank of the Philippines
Government Bank
Sources of Long-Term Funds
Specializes in underwriting securities, fund management, and financial advisory services; they help raise funds through equity and debt for companies and governments.
example: First Metro investment Corporation (FMIC)
Investment Bank
Definition: An obligation that matures for more than a year and is usually paid in installments.
Alternative Sources: Firms who do not have access to the financial market may opt for commercial banks, insurance companies, or other financial institutions, where interest rates are generally higher.
Types: can be either secured or unsecured.
Long-Term Loans
What are the 2 types of Long-Term Loan?
Terms & Mortgages
Definition: An obligation whose maturity is more than a year.
Negotiation: The borrower generally negotiates directly with the creditor, rather than using an investment banker as an intermediary.
Purpose: Typically obtained for purchasing capital assets such as land, buildings, machinery, and equipment.
Other Purposes: May also be used for expansion or to repay currently maturing obligations.
Collateral: These loans may or may not require collateral.
Term Loan
Definition: An obligation granted by creditors that uses real estate or movable assets as collateral.
Parties Involved: The borrower is termed the mortgagor, and the lender is the mortgagee.
Process: Takes place when the owner of the property conveys the title to the mortgagee by signing a deed of assignment.
Mortgages
What are the 2 types of Mortgage?
Real Estate Mortgage & Chattel Mortgage
When real estate is used as collateral.
Real Estate Mortgage
When an automobile or equipment is used as collateral.
Chattel Mortgage
Definition: Long-term debt instruments issued by corporations or governments to raise large sums of money.
Repayment: The issuer must repay the principal at face value on the maturity date and make periodic interest payments until then.
Purpose: Primarily used for large-scale funding, especially when borrowing from the public.
Bonds
What are the 3 Features of a Bond Issue?
- Bond indenture
- Bond Certificates
- Interest Payments
Key Features of Bonds
It is a legal document detailing terms of the bond issue, including borrower rights and obligations
Bond Indenture
Key Features of Bonds
Evidence of debt, usually in denominations like ₱100,000.00.
Bond Certificates
Key Features of Bonds
Typically semi-annual, calculated using the bond’s nominal interest rate.
Interest Payments
Details of the Terms of Bond Inssuance
Definition: The agreement specifies the nominal interest rate to be used for computing interest and the principal amount to be repaid on the maturity date.
Nominal Rate, Principal or Face Amount
Details of the Terms of Bond Inssuance
Definition: The price at which investors buy bonds when they are first issued.
Net Proceeds: Calculated as the issue price minus issuance fees.
Calculation: is the sum of the present values of the bond’s face value and all coupon payments.
Issue Price
Details of the Terms of Bond Inssuance
Definition: The date on which the issuer must repay the nominal amount of the bond.
Obligations: As long as all payments have been made, the issuer will have no further obligations to the bondholders after the term.
Maturity Date
What are the 16 types of Bonds
- Term Bond
- Serial Bond
- Secured Bond
- Unsecured Bond (Debenture Bond)
- Registered Bond
- Bearer Bond
- Convertible Bond
- Callable Bond
- Guaranteed Bond
- Junk Bond (High-Yield Bond)
- Floating Rate Bond
- Fixed-Rate Bond
- Putable Bond
- Perpetual Bond
- Zero-Coupon Bond
- Indexed Bond
Bonds that pay periodic interest (coupon payments) until maturity. They are widely used for raising capital and are attractive to investors looking for steady income.
Includes Fixed-rate bonds, Floating-rate bonds, Callable bonds, Convertible Bonds, Putable bonds, Perceptual Bonds
Interest-Bearing Bonds
Interest-Bearing Bonds
Pay a consistent interest rate throughout the bond’s life.
Fixed-rate bonds
Definition: Bonds that mature on a single date. These usually require firms to establish a sinking fund to ensure they can pay off the bond at maturity.
Term Bonds
Interest-Bearing Bonds
Interest rates adjust periodically based on a benchmark rate (e.g., LIBOR).
Floating-rate bonds
Interest-Bearing Bonds
Allow the issuer to repay the bond before its maturity date, often at a premium.
Callable bonds
Interest-Bearing Bonds
Can be converted into a predetermined number of shares of the issuing company.
Convertible bonds
Interest-Bearing Bonds
Give investors the option to sell the bond back to the issuer before maturity at a specified price.
Putable bonds
Interest-Bearing Bonds
Have no maturity date and pay interest indefinitely.
Perpetual bonds
Do not pay periodic interest. Instead, they are issued at a deep discount and redeemed at face value at maturity. The difference between the purchase price and the par value represents the investor’s return.
Zero-Coupon Bonds
Payments adjust based on inflation rates, protecting investors from inflation risk.
Indexed Bonds
Offer higher returns to compensate for higher credit risk associated with lower-rated issuers.
High-Yield (Junk) Bonds
Backed by collateral (e.g., real estate or other assets).
Secured Bonds
Not backed by specific assets, relying on the issuer’s creditworthiness.
Unsecured Bonds (Debentures)
Define the rights and conditions under which certain actions can be taken in relation to the bond, protecting both the bondholder and the issuer. These outline specific rights or actions that influence the bond’s behavior over its lifetime and can be negotiated at the time of issuance to align with the interests of both parties.
Key Provisions
What are the 3 Key Provisions?
- Call Provision
- Conversion Provision
- Sinking Fund Provision
Key Provisions
Allows the issuer to redeem bonds before maturity, usually if interest rates drop.
Call provision
Key Provisions
Enables bondholders to convert bonds into shares of the issuing company’s stock.
Conversion Provision
Key Provisions
Requires the issuer to set aside funds periodically to repay the bond, reducing the default risk.
Sinking fund provision
Bond Valuation Basics
The bond’s coupon rate divided by its current market price.
= (Annual Coupon/ Current Market Price of the Bond) X 100
Current Yield
Bond Valuation Basics
Definition: The total return an investor expects if the bond is held until maturity, accounting for all coupon payments and the redemption of face value.
Purpose: This helps track the repayment of bond principal over time, showing the interest and principal portions of payments.
Yield-to-Maturity (YTM)
Definition: Bonds where the principal amount matures in series over time, allowing companies to pay their obligations in installments.
Serial Bonds
Definition: Bonds where the bondholder’s name is registered with the corporation, and the corporation keeps track of ownership.
Registered Bonds
Definition: Bonds where ownership is not recorded, and interest is paid to the holder of the bond certificates (bearer).
Bearer Bonds
Definition: Bonds backed by another company or individual, who guarantees payment in case of default.
Guaranteed Bonds
A contract between two parties, typically the lessor and the lessee, where the lessor grants the lessee the right to use an asset in exchange for periodic payments. The terms and conditions of the lease, including the payment schedule, duration, maintenance responsibilities, and other factors, are stipulated in the contract.
Lease
The owner or rightful user (if sub-leasing is allowed) of the asset subject to lease. The lessor grants the lessee the right to use the asset under the agreed terms.
Lessor
What are the 2 Types of leases?
Operating Lease & Financial Lease or Capital Lease
A type of lease where the lessor owns the asset, and the lessee rents the asset. The lease payments generally do not cover the full value of the asset. The lessor retains the asset’s title, and they typically handle the depreciation expense. Additional costs such as maintenance, insurance, and property taxes may be determined based on the contract terms.
Operating Lease
A contract where the rental payments closely approach the cost of the leased asset. This lease is typically non-cancellable, and the lessee is obligated to make payments until the lease term ends, regardless of the asset’s use. The lessee may have the option to purchase the asset, and they assume responsibility for maintenance, taxes, and insurance. The lessee records the transaction as a purchase, and the lessor treats it as a sale.
Financial Lease (Capital Lease)
represent a claim on the corporation’s assets and earnings. There are two main types.
Stocks
What are the 2 main types of stocks?
Common Stock & Preferred Stock
main types of stocks
- Basic form of stock.
- Provides voting rights and eligibility for dividends.
- If only one type of stock is issued, it is considered common stock.
Common Stock
main types of stocks
- Priority over common stockholders for receiving dividends and in the event of liquidation.
- Usually does not have voting rights.
Preffered Stock
- Proof of ownership of stock in a corporation.
- Contains the name of the issuing firm, type of stock (common or preferred), number of shares, and name of the investor.
- Can be transferred by endorsing the back of the certificate.
Stock Certificate
