Source of Finance Debt (OT)

Question 1

What is meant by long-term borrowing?

Answer 1

Debt

Question 2

Unquoted company finance?

Answer 2

Long-term loan

Question 3

Quoted company finance?

Answer 3

Long-term loan from bank

Issue “traded debt” (bonds)

Question 4

What is traded debt?

Answer 4

Instead of just one lender, advertise for people to lend them the money. Once bought, can then be sold via the stock exchange

Question 5

What is meant by “quoted at”?

Answer 5

This represents the market value

Question 6

What is the interest rate on traded debt?

Answer 6

Represents the interest rate of the nominal/par value

Question 7

What is the coupon rate?

Answer 7

Interest rate on nominal

Question 8

As bank interest rate goes down?

Answer 8

People will have to pay a lot more

Question 9

Once interest rate on traded debt is put on the stock exchange?

Answer 9

Turns from fixed to variable

Question 10

How can company make lenders lend at lower interest rates?

Answer 10

I promise to repay at a premium (e.g. 5% loan stock repayable in 10 years time at premium of 10%)

Question 11

5% loan stock repayable in 10 years time at premium of 10% meaning?

Answer 11

Borrow $100
Interest $5 per annum
Repay in 10 years $110

Question 12

What is convertible debt?

Answer 12

When it’s time for redemption. Investors have a chouce of either take cash or take a fixed number of shares in the company

Question 13

Another word for repayment?

Answer 13

Redemption

Question 14

Example of a convertible debt choice in five years time?

Answer 14

Take cash $100
Take shares $140

Question 15

Why is convertible debt good for company?

Answer 15

Provided share price is high enough, no cash flow problem as people will take shares if it’s high

Lenders are likely to accept lower interest because they’re expecting to make a lot more

Question 16

What are warrants?

Answer 16

Entitles holder to buy shares in a company at a fixed price on a fixed future date

Question 17

Example of warrant?

Answer 17

6% bonds 2020. A warrant entitles them to buy 20 shares at fixed price of $2 per share in 2015.

Question 18

Benefits of warrant?

Answer 18

Likely to increase profitability therefore likely to accept lower interest rate

Question 19

What is interest yield?

Answer 19

Coupon rate / amount

Question 20

What is redemption yield?

Answer 20

Interest yield + bonus at the end

Question 21

What is crowdfunding?

Answer 21

People give money, in return I give a product

Question 22

When borrowing a loan?

Answer 22

Borrow money from bank and then I pay them the interest

Question 23

What is peer-to-peer funding?

Answer 23

Individuals or companies lend directly to each other. Bank is removed. Lender gets higher interest, borrower goes lower interest

Question 24

Issue with peer-to-peer?

Answer 24

Very risky