Podcast
Questions and Answers
What is the total amount of interest paid over the duration of the loan?
What is the total amount of interest paid over the duration of the loan?
Which fee is charged as a percentage of the loan amount?
Which fee is charged as a percentage of the loan amount?
How much will the debt level be after the second year?
How much will the debt level be after the second year?
What is the annual account management fee over the life of the loan?
What is the annual account management fee over the life of the loan?
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What is the nominal interest rate for this loan?
What is the nominal interest rate for this loan?
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What best describes a floating rate note?
What best describes a floating rate note?
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Which factor influences the spread of a floating rate note?
Which factor influences the spread of a floating rate note?
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What happens to the interest payment of a floating rate note when interest rates fall?
What happens to the interest payment of a floating rate note when interest rates fall?
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How often is the interest rate of a floating rate note typically adjusted?
How often is the interest rate of a floating rate note typically adjusted?
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What is a key advantage of floating rate notes for investors?
What is a key advantage of floating rate notes for investors?
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What percentage represents the spread in the given data?
What percentage represents the spread in the given data?
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Which factor is NOT analyzed by rating agencies to determine credit risk?
Which factor is NOT analyzed by rating agencies to determine credit risk?
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What does the rating from agencies indicate regarding debtors?
What does the rating from agencies indicate regarding debtors?
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What is represented by the term 'receivables status' in the provided data?
What is represented by the term 'receivables status' in the provided data?
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What is the purpose of the ratings prepared by external parties?
What is the purpose of the ratings prepared by external parties?
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Which of these is NOT a factor considered when calculating the effective interest rate?
Which of these is NOT a factor considered when calculating the effective interest rate?
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What does the term 'Euribor' stand for?
What does the term 'Euribor' stand for?
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Which of the following is NOT a type of repayment form for loans?
Which of the following is NOT a type of repayment form for loans?
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Which of the following is a characteristic of constant repayment for a loan?
Which of the following is a characteristic of constant repayment for a loan?
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Why is the effective interest rate important?
Why is the effective interest rate important?
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What is the difference between 'free years' and 'repayment-free years' in loan terms?
What is the difference between 'free years' and 'repayment-free years' in loan terms?
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What happens to the total periodic charge in a constant repayment loan?
What happens to the total periodic charge in a constant repayment loan?
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What is the profit calculated after taking into account rental income, depreciation, and interest on borrowed capital?
What is the profit calculated after taking into account rental income, depreciation, and interest on borrowed capital?
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Which of the following is NOT a factor considered when setting Euribor values?
Which of the following is NOT a factor considered when setting Euribor values?
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What does a return on equity (ROE) of 11% indicate in this scenario?
What does a return on equity (ROE) of 11% indicate in this scenario?
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What is the main difference between the nominal interest rate and the effective interest rate?
What is the main difference between the nominal interest rate and the effective interest rate?
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What is the relationship between debt capital and return on equity as described in the content?
What is the relationship between debt capital and return on equity as described in the content?
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What happens to the leverage effect when the interest rate exceeds the return on investment?
What happens to the leverage effect when the interest rate exceeds the return on investment?
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What does a 50% equity ratio indicate about the company's financial leverage?
What does a 50% equity ratio indicate about the company's financial leverage?
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At which point does the bank refuse to provide further loans to a company?
At which point does the bank refuse to provide further loans to a company?
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What is the main risk associated with continuously replacing equity with debt?
What is the main risk associated with continuously replacing equity with debt?
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What would happen if the interest rate on the loan rises to 9% while the return on investment remains at 8%?
What would happen if the interest rate on the loan rises to 9% while the return on investment remains at 8%?
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What is a key characteristic of bonds compared to loans?
What is a key characteristic of bonds compared to loans?
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What is the typical maturity period for corporate bonds?
What is the typical maturity period for corporate bonds?
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What does an issue price of 97% indicate?
What does an issue price of 97% indicate?
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Who is the debtor when a bond is issued?
Who is the debtor when a bond is issued?
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What does a floating rate note depend on?
What does a floating rate note depend on?
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What happens to the bond if the issuer decides to call it?
What happens to the bond if the issuer decides to call it?
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What is typically true about the volume of exchange-traded bonds?
What is typically true about the volume of exchange-traded bonds?
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What is the typical repayment rate for bonds?
What is the typical repayment rate for bonds?
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Study Notes
Course Information
- Course title: I&F 2
- Instructor: MMag. Jirina Ley, MSc
- Institution: FH Kärnten
Course Overview
- Unit 1 (Onsite): Debt financing / Capital Structure / Bonds (12.11.2024)
- Unit 2 (Onsite): Equities / Intro Company valuation (20.11.2024)
- Unit 3 (Onsite): Company Valuation (21.11.2024)
- Unit 4 (Asynchronous): Startup-financing / Crowdfunding (23.11.2024)
- Unit 5 (Onsite): Presentation + Exam (10.12.2024)
Workload and Grading
- Exam (45 minutes): 70%
- Presentation: 30% (15 minutes per group)
- Grading scale:
- 90% - 100%: Excellent
- 80% - 89%: Good
- 65% - 79%: Satisfactory
- 50% - 64%: Sufficient
- 0% - 49%: Not sufficient
Agenda
- Loan
- Bonds
- Shares
- Business valuation
- Crowdfunding
- Start-up financing
Loan Characteristics
- Most common form of long-term debt financing
- Conditions negotiated individually between bank and company
- Components of the credit agreement include:
- Lenders and borrowers
- Loan purpose (investment, consumer)
- Credit volume and currency
- Disbursement amount (loan value)
- Repayment form (bullet, constant, annuity, free years)
- Duration
- Borrowing costs (interest, processing fees, account management)
- Termination rights
- Collateral
Loan Interest Rate
- Risk-free interest rate + risk premium (spread)
- Fixed or variable (e.g., EURIBOR)
- Pre- or post-fixed
- Annually, semi-annually, or quarterly
Loan Commissions and Fees
- Handling fee
- Account management fee
- Possible contract set-up fee
EURIBOR
- Euro Interbank Offered Rate
- Average interest rate European banks lend money to each other
- Daily values calculated and communicated at 11:00 CET
- Values exclude highest/lowest 15%
- Different maturities (1 week, 1, 3, 6, 12 months)
Nominal vs. Effective Interest Rate
- Agreed interest rate = nominal interest rate
- Effective interest rate calculated using approximation method (calculation of internal interest rate)
- Effective interest rate must be stated by lender
- Comparison of effective interest rate has same deficiencies as internal rate of return method
Loan Repayment and Terms
-
Redemption:
- Total of all payments equals loan amount
-
Repayment Forms:
- Annuity repayment (equal payments)
- Constant redemption (constant partial amounts)
- Bullet repayment (repayment at the end of the term)
- Free years (years with only interest payments)
- Repayment-free years (years with no principal or interest payments)
Constant Repayment - Loan
- Graphical representation of constant partial amounts from the credit amount
- Total periodic charge decreases due to falling interest charges
Annuity Loan
- Equal repayment rates (annuities)
- Ratio between interest and repayment portion changes during the term
Loan - Annuity Repayment
- Calculation of the annuity using formula
Solution L2: Annuity Amortization
- Detailed table showing repayment schedule for the loan, including components like interest, handling fees, and account management fees.
Final Repayment - Loans
- Entire loan amount repaid at the end of the term
- Interest payments only during free years
- Periods without principal or interest repayment = repayment-free periods
Loan - Bullet Repayment
- Repayment form: one-time payment at the end of the term
Loan Summary
- Loan amount
- Debt level
- Repayment (priority III)
- Interest (priority II)
- Other payment (e.g., fees - priority I)
- Order of allocation of funds
Consequences of Changes During the Term
- Changes in the term/interest rates impact repayment schedules
- Repayment not fully made or interest/fees not paid impact calculation of redemption payments.
L4: Change in Constant Amortization Loan
- Information on changes in repayment and interest rates throughout the loan term
- Modification schedule reflecting additional changes in the repayment schedule
L5: Change in Annuity Loan
- Information on changes in repayment and interest rates throughout the loan term
- Modification schedule reflecting additional changes in the repayment schedule
L6: Loan with Annuity Repayment
- Details of a loan with annuity repayment, amount, duration, and interest rate, as well as fees/handling fees.
Leverage Effect (1/2, 2/2)
-Describes the potential for increased return on equity by using borrowed funds rather than investing solely with equity
- Discusses the balance sheet for a house with 4 residential units in Villach
- Calculates return on equity (profit/equity)
Limits of the Leverage Effect
- Higher levels of debt lead to higher interest rates and potential negative impacts in certain conditions.
- The return on investment must be higher than the interest rate to generate a positive leverage effect
- Differentiates between positive and negative leverage effects
Bond Characteristics
- Classic long-term debt financing instrument
- Usually involves a higher financing requirement than a loan.
- Broken into partial bonds
- Variety of creditors
- Traded on secondary market (e.g., stock exchange)
Bonds - Features (1/2, 2/2)
- Maturity (usually 6-12 years for corporate bonds)
- Currency (home or foreign)
- Volume and denomination
- Redemption (bullet or installments)
- Interest rate (fixed or floating)
- Issue and redemption price (Discount or premium)
- Termination (call risk premiums)
- Collateral
Final Maturity Coupon Bond
- Interest payments during term
- Full repayment at the end of the term
- Example figures for time-based payment
L7: Final Maturity Coupon Bond (1/2, 2/2)
- The company issued a bullet coupon bond with nominal value, term, interest rate, and redemption rate
- Calculation of redemption schedule, indicating debt level and repayments at each point in time
Zero Coupon Bond
- Bonds without interest payments
- Yield from difference between issue and redemption price
- Repayment at maturity
L8: Zero Coupon Bond
- Company issues a zero coupon bond
- Specified term, issue price, redemption price, and expenses
- Calculation of the redemption schedule
Floating Rate Note (1/2)
- Floating interest rates adjusted periodically to reference rate (e.g. EURIBOR) plus spread.
- Spread varies based on issuer creditworthiness
- Advantage for issuer when interest rates fall
- Low price risk for investor
- Interest payment calculation
L9: Floating Rate Note
- Investor subscribed to a floating rate note
- Specified nominal amount, interest rate, issue price, repayment rate, and term
- Calculation of investor inflows and outflows given various Euribor values
Rating Agencies
- Analyze operational risk to determine credit risk
- Evaluate financial risk
- Ratings indicate ability to make principal/interest payments
- Important for international credit markets
- Agencies often have potential conflicts of interest but aim to provide objective information.
Rating Levels
- Different rating levels (Aaa to D) for varying levels of creditworthiness by credit rating agencies
- Different agencies use different rating scales
- Investment grade bonds are a specific sector of financial investments
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Description
Test your knowledge on loan management concepts such as interest calculations, annual fees, and debt levels over time. This quiz covers essential questions that a borrower should know to make informed financial decisions.
