Loan Management Quiz

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

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.