All businesses need to raise finance to run a business

Jun 27th, 2015
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Abilene Christian University
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Factors to consider before opting for a specific type of finance:  Size of the business  Purpose for which the finance is needed (e.g solving a short term cash flow problem will not require the same source of funding as for an expansion plan)  Amount required  Time scale (long term, medium term or short term) Difference between Capital Expenditure and Revenue Expenditure Capital Expenditure: Spending on the purchase of fixed assets Revenue Expenditure: Spending on the day to day running of a business

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Chapter 5Bonds, Bond Valuation, andInterest Rates1Key Features of a BondPar value: Face amount; paid atmaturity. Assume $1,000.Coupon interest rate: Statedinterest rate. Multiply by par valueto get dollars of interest. Generallyfixed.(More)2Maturity: Years until bond must berepaid. Declines.Issue date: Date when bond wasissued.Default risk: Risk that issuer willnot make interest or principalpayments.3Call ProvisionIssuer can refund if rates decline.That helps the issuer but hurts theinvestor.Therefore, borrowers are willing topay more, and lenders requiremore, on callable bonds.Most bonds have a deferred calland a declining call premium.4Whats a sinking fund?Provision to pay off a loan over itslife rather than all at maturity.Similar to amortization on a termloan.Reduces risk to investor, shortensaverage maturity.But not good for investors if ratesdecline after issuance.5Sinking funds aregenerally handled in 2waysCall x% at par per year for sinkingfund purposes.Call if rd is below the coupon rate andbond sells at a premium.Buy bonds on open market.Use open market purchase if rd isabove coupon rate and bond sells at adiscount.6Value of a 10-year, 10%coupon bond if rd = 10%01210%V=?10...100100100 + 1,000$100$100$1,000VB =+... ++1N(1 + rd)(1 + rd) (1 + rd)N= $90.91 += $1,000.. . . + $38.55 + $385

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