Topic 3- Debt Financing Flashcards
What is a financial market?
An opportunity where you are able to buy and sell various types of securities (debt, shares etc.)
What is a primary market?
Market for providing a new security & administrating it
What is a secondary market?
Market for the trade of existing securities
What is a money market?
Securities in money market are short term (maturity of a year or less) with high liquidity (therefore are easily converted into cash (instrument))
What is a capital market?
Typically used as an opportunity to obtain long term financing for capital investment (securities with maturity more than a year)
What is debt?
Debt is an entity that must be relayed in the form of the principle amount aswell as interest
What are advantages of debt?
- Less expensive & risky than equity
- Lower return but more control (don’t have voting rights)
What are disadvantages of debt?
- Higher financial risk (possibility of liquidation)
- Shareholders have no ownership over any assets in the company, only what’s left at the end
What is bank borrowing?
- An opportunity for finance without capital markets
- Available to all sizes of firms
- Fast method of borrowing (less admin & legal expenses)
- More room for accommodation & bargaining
What are syndicated loans?
- Practical when forms requires finance quickly & discretely (e.g mergers)
- Reduced cost of finance as higher number of banks are taking the risk when lessens the cost
What are corporate bonds?
- Stable (long term) method of financing
- No banks used, public bond markets used
- Paying interest, principle or both is required
What are straight bonds?
Predetermined coupon bonds (typically annual or semi annual coupon payments)
What are zero coupon bonds?
No interest payments, given at discount value and reclaimed at Par Value
What are perpetual bonds?
Bonds that hold interest payments for perpetuity and have no maturity date (pay forever)
What are junk bonds?
Increased risk but provide greater returns
