Financial Management - DEBT VALUATION AND INTEREST

 

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Chapter 5
Corporate borrowings (Debts)	Two types of debts: Loan = Private debt Bonds = Public debt
Loan provided by financial institutions	Loan for day-to-day operations = working capital loans Equipment or property purchasing = transaction loans
Pro and cons of Debt Placements	Advantages: ·         Speed ·         Cost reducing ·         Financial flexibility ·         Freedom to choose investor. ·         Save cost and time. Disadvantages: ·         Interest costs ·         Less potential investor
Three basic functions of investment	1.      Underwriting ·         Underwriting as a middleman between company and investor in the stock markets. ·         Underwriting(包销)do not have to bear the risk of securities(证券) not finish sold. ·         Suitable for those company who are lack of visibility and experience but needed to raise funds quickly.   2.      Advising证卷咨询   3.      Distributing证卷发行
Basic features of bond	·         Par value/face value ·         Coupon Interest rate ·         Maturity and repayment of principal ·         Risk and rating ·         Tax status
Yield to Maturity (YTM)	Also, know as expected return, refer to the final return of interest and profit at the end of the repayment period. 也称为预期收益，是指还款期末的最终利息和利润收益。
Bond value	Formula:   = (PV of bonds interest+ PV of face value)
Yield to maturity	Formula：   A= (NPV a / NPV a- NPV b) * rate b- rate a
Type of yield	·         Nominal Yield ·         Current Yield ·         Yield to maturity ·         Yield to call
Difference between current yield and YTM	Current yield当期收益率 ·         The actual profit that straight produce by interest. ·         Not show total return in future Yield to maturity到期收益率 ·         The total rate of return that receive with the bonds after it grows mature. ·         The most useful type of yield that investor pay attention to.
Relationship between YTM and bonds value	·         The value of bonds was inversely related to changes in the market that requires YTM. ·         The value of bonds will be lesser than the par value if the market is requiring YTM. ·         While reaching maturity date, the value of bonds approaches its par value. ·         Longer YTM bonds usually have a greater interest rate then the short YTM bonds.
Characteristic of bonds	·         Coupon level ·         Abnormal risk ·         Convertibility ·         Amortizing / non-amortizing ·         Security / insecurity ·         Initial offering market ·         Priority of claiming

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