Sources of Finance - Debt

Question 1

Bonds

Answer 1

Long-term debt (debentures or loan notes)

Question 2

Bonds can be:

Answer 2

Traded on stock markets
May be secured of unsecured.
Secured debt carries a charge of land, buildings, in a fixed charge, or on all assets (floating charge)
Can be redeemable or irredeemable
Irredeemable - not repayable at a specific point. Interest paid in perpetuity until principal is repaid

Question 3

5% Loan notes redeemable at nominal value

Answer 3

5% on $100 - coupon rate paid as interest for having the debt
Will be repaid at nominal value e.g. $100

Question 4

Characteristics of Long-term debt

Answer 4

Investor viewpoint:
Low risk, low return
No voting rights
Company viewpoint:
Cheap, does not dilute control
Inflexible, increases risk as it increases gearing, must be repaid

Question 5

Deep discount bond

Answer 5

Company receives less money, pay back the nominal, still pay interest

Question 6

Zero coupon

Answer 6

Same as deep discount with no coupon payment

Question 7

Hybrid (convertible loan notes)

Answer 7

Convert to equity at a pre-determined price e.g. 400cc per share, or ratio: $100 of stock converted into 25 ordinary shares

Question 8

Islamic Finance

Answer 8

Murabaha - bank buys asset off a company for more than it’s worth, company pays it back
Ijara - lease finance
Sukuk - debt finance over assets, no voting rights, has interest elements
Mudaraba - equity finance SHORT TERM ONLY, one person provides money, other provides expertise
Musharaka - venture capital

Question 9

Long-term leases

Answer 9

Lessee responsible for repairs
Lessee takes on risk and rewards of ownership
Lease agreement cannot be cancelled