AEM324 - Debt financing_Notes - Debt Financing Definitions,...

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Debt Financing Definitions, provisions, variations 1. Asset based financing -many small and medium sized companies that do not have a good enough credit standing to permit unsecured borrowing use this mode of financing -a bank or commercial finance company will lend money secured by some pledged asset, typically accounts receivable or inventory 2. Callable bonds -redeemable by the issuer before the scheduled maturity; the issuer must pay the bond holders a premium price if such a security is retired early -such bonds are usually called when interest rates fall so much that the issuer can save money by floating new bonds at lower rates -call price (redemption price) is the price at which a bond with a call provision or call feature can be redeemed by the issuer -in order to compensate the holder for loss of income (from interest) and ownership, the call price is usually higher than the par value of the security; the difference between the call price and the par value is the call premium -call protection is the length of time during which a security cannot be redeemed by the issuer 3. Commercial paper -short-term obligations with maturities ranging from 2 to 270 days, issued by banks, corporations, and other borrowers to investors with temporarily idle cash -usually unsecured and discounted, although some are interest-bearing -can be issued directly or through brokers that are equipped to handle the enormous clerical volume involved -issuers of commercial paper like it because the maturities are flexible and the rates are usually marginally lower than bank rates -investors (lenders because commercial paper is a form of debt) like the flexibility and safety of an instrument that is issued only by top-rated concerns, and is nearly always backed by bank lines of credit 4. Convertibles -corporate securities (typically preferred shares or bonds) that are exchangeable for a set number of another form (usually common shares) at a prestated price -appropriate for investors that want higher income than is available form common stock, along
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This note was uploaded on 02/20/2009 for the course AEM 3240 taught by Professor Curtis,r. during the Fall '07 term at Cornell University (Engineering School).

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AEM324 - Debt financing_Notes - Debt Financing Definitions,...

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