1.2 Financial Instruments - Debt

1.2 Financial Instruments - Debt - An investment of...

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Click to edit Master subtitle style  8/29/2010  © H Toprac An investment of knowledge always pays the best interest Benjamin Franklin
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Click to edit Master subtitle style  8/29/2010  © H Toprac Foundations of Finance 1.2 Financial Instruments Debt Instruments
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 8/29/2010  © H Toprac Imagine you need $25,000 this week How will you get the money? Your options: Borrow the money: get a cash advance on your credit card, take out a loan… Sell something you own: perhaps via E-bay or Craigslist 3 How do people raise cash?
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 8/29/2010  © H Toprac When companies need extra cash, they have the same two options: Borrow the money Sell something they own, above and beyond selling their regular product or service; that is, sell part of the company The first option is called issuing debt; the second, issuing equity 4 How do companies raise cash?
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 8/29/2010  © H Toprac Financial instruments (aka securities) are debts and equities that: Companies “issue” to obtain immediate cash inflows, and Investors buy in the hope of obtaining future cash inflows Examples of debt instruments: Bonds, Loans, T-bills, Commercial paper, etc. 5 What’s a financial instrument?
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 8/29/2010  © H Toprac Principal: the amount to be repaid; also called the par/face/maturity value Interest: the cost of borrowing money Bond interest rate is called the “coupon” rate Not all bonds pay interest, (zero coupon bonds) thus price is discounted from par Maturity date: when principal is due 6 All debts share some characteristics
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 8/29/2010  © H Toprac In the event of liquidation, employees & customers are paid first, the government next, then creditors. Equity-holders are last.
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1.2 Financial Instruments - Debt - An investment of...

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