Debt Finance Flashcards
(8 cards)
What is a key feature of a term loan?
A. Repayable only on demand by the bank
B. Repayable in either a lump sum or in instalments over a fixed term
C. Repayable only if the borrower chooses
D. It does not accrue interest
B. Repayable in either a lump sum or in instalments over a fixed term
Explanation: Term loans are fixed-term borrowings repaid in a lump sum (bullet) or in instalments (amortising), and they accrue interest throughout the term.
Which of the following is NOT a typical characteristic of debt securities?
A. Issued in return for finance
B. Intended to be traded
C. Entitle holders to vote at general meetings
D. Can be sold to other investors
C. Entitle holders to vote at general meetings
Explanation: Debt securities like bonds do not give voting rights, unlike equity shares. They are financial instruments that acknowledge debt and may be traded.
Alpha Ltd issues 100,000 ordinary shares at £2 per share. The nominal value is £1. What is recorded in the share premium account?
A. £200,000
B. £0
C. £100,000
D. £1
C. £100,000
Explanation: Share premium is the amount paid above the nominal value. (£2 - £1) × 100,000 = £100,000 recorded in the share premium account.
Which of the following would be considered a hybrid instrument of finance?
A. Overdraft
B. Convertible bond
C. Term loan
D. Debenture
B. Convertible bond
Explanation: Convertible bonds start as debt but can be converted into shares, combining elements of both debt and equity.
Beta Ltd takes out a loan secured over all its assets. The document detailing this arrangement is known as:
A. Loan agreement
B. Term sheet
C. Share certificate
D. Debenture
D. Debenture
Explanation: A debenture is a type of security document that sets out the terms of the security over the company’s assets, separate from the loan agreement.
Which statement best describes the role of undertakings in a loan agreement?
A. They are promises to do or not do certain things
B. They are factual statements made at signing
C. They specify the repayment method
D. They detail tax arrangements between lender and borrower
A. They are promises to do or not do certain things
Explanation: Undertakings (also called covenants) are commitments by the borrower to act or refrain from acting in particular ways, ensuring continued compliance with the lender’s requirements.
Gamma Ltd has an overdraft facility but needs more structured, longer-term funding. Which facility would be most appropriate?
A. Term loan
B. Convertible bonds
C. Additional overdraft
D. Preference shares
A. Term loan
Explanation: A term loan provides a set loan amount, structured repayment over time, and is ideal for longer-term finance needs, unlike overdrafts which are short-term and repayable on demand.
Zeta Ltd issues a bond, promising to repay the investor in 5 years with interest. The investor sells it to another party. What type of finance is this?
A. Revolving facility
B. Overdraft
C. Equity finance
D. Debt security
D. Debt security
Explanation: The bond is a debt security: it acknowledges a loan to the company, pays interest, and is tradable between investors.
