a) Following are the different sources of debt financing:
LOANS
Loans are the most common and popular mode of debt finance for a
company. Businesses borrow money from commercial lenders like banks
by keeping some collateral security against the loan. Loans from
banks and other commercial lenders are for a fixed period and
business needs to pay regular interest for it. The loans can be for
short, intermediate or long-term depending upon the financial
requirements of the business.
TRADE CREDIT
Trade credit is an arrangement in which the business can
purchase the goods now and pay for them later. This way the
business can avail debt financing for short term. Trade credit is a
good mode of finance for startups as they cannot afford to obtain
loans of the higher amount by placing a collateral society.
INSTALLMENT PURCHASE
Purchasing the capital goods on installment is another type of
debt financing. Installment purchase comprises of buying an asset
and making payment in pre-determined installments. The buyer has to
mortgage its asset until full payment of installment is made. A
business that has higher credit rating may not have to mortgage any
asset. Banks and finance companies provide the facility of
installment purchase to the business.
ASSET BASED LENDERS
Asset-based lenders are those finance companies that lend money
to the business for purchasing the assets. The business in return
has to pledge its assets like inventory, accounts receivables, etc.
This type of debt financing is very useful for businesses that have
higher inventory, account receivables, real estate or any other
asset that can be pledged.
BONDS
Bonds are a source of debt capital for businesses that are well
established and need funds for long-term growth of the business.
The company can raise funds by selling bonds to different buyers
and sharing profits on the projects for which bonds are issued.
Short term loans, trade creditn are a good source of inventory
financing since inventory is financed by short term source of
funding.
Whereas long term loans, installment purachase, bonds, asset
based lenders are good source of financing for purachase of
building.
b) Face Value = $ 150,000
Yield
=
2.5% p.a.
Time
=
90 days
Now, Interest to be paid on the
commercial paper is:
$ 150,000 * 2.5% * 90
365
= $ 925
Net fund raised by Pearson = $ 150,000
- $ 925
= $ 149,075
c) Whenever the coupon rate is equal
to the yield to maturity, bond will be sold at Par value.
In the given scenario, since, coupon
rate and yield to maturity are same, implied price of the bond will
be equal to the face value, i.e. $ 1000.
d) Holding period yield = (B1-B0) + Interest
B0
=
(1030-1000) +
(1000*4%*3)
1000
= 0.15 or 15 %
The above holding period yield is for
a period of 1.5 years.
Therefore, the annual yield will
be:
15/1.5 = 10% p.a.
Note: Interest is calculated taking
coupon rate as half (4%) since the interest is calculated semi
annually for 1.5 years (3 half yearly payments)
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