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Financial Institutions, Instruments and Markets 8th edition Instructor's Resource Manual Christopher Viney and Peter Phillips Chapter 10 Medium- to long-term debt University of New South WalesFINS 1612Viney8e_IRM_ch10

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Financial Institutions, Instruments and Markets 8th edition Instructor's Resource Manual Christopher Viney and Peter Phillips Chapter 10 Medium- to long-term debt Learning objective 1: Explain t ... erm loans and fully drawn advances, including their structure, loan covenants, and the calculation of a loan instalment  The financial system provides corporations with a wide range of medium- to long-term loan and debt facilities. These facilities allow a corporation to diversify its funding sources and match its cash-flow requirements.  The sources of medium- to long-term debt may be intermediated finance provided by financial institutions or direct finance obtained from either the domestic or the international capital markets.  A common form of intermediated debt is the term loan or fully drawn advance. The main providers of term loans are the commercial banks. However, investment banks, finance companies, insurance offices and credit unions also provide term loans to the business sector.  Term loans are provided to fund a specific purpose or project for a fixed period of time.  The repayment structure of a term loan may be amortised (each periodic instalment incorporates an interest component and also a principal repayment component), interest only (each periodic instalment only comprises the interest due on the full loan amount) or deferred (repayment is deferred for a period until the business project generates positive cash flows).  The normal practice is to price a variable-rate loan at a margin above a reference interest rate. The margin will reflect the level of credit risk of the borrower. 1 During the term of a variable rate loan, the interest rate will be periodically reset in relation to changes in the specified reference rate, such as LIBOR, BBSW or the bank’s own prime rate.  The bank bill swap rate (BBSW) is the mid-point of prime banks’ bid and offer rates for eligible securities in the NCD and BAB secondary markets and is published by the AFMA. Thomson-Reuters publishes LIBOR daily.  A range of fees may also apply, including an establishment fee, a periodic service fee, a commitment fee or a line fee.  Issues that a lender will consider when determining an interest rate and the margin include the credit risk of the borrower, the term of the loan and the loan repayment schedule.  A loan contract may include a range of loan covenants to protect the lender. They include positive covenants, which state actions that must be taken by a borrower (e.g. provision of financial statements), and negative covenants, which limit the actions of a borrower (e.g. minimum debt to equity ratio) [Show More]

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