Sources of finance (cont)- financial management ppt module 2

financial management

1. Sources of finance ( cont )

2. 2.Bonds Bonds are financial instruments used by governments, municipalities, and corporations to raise capital. When you purchase a bond, you are essentially lending money to the issuer in exchange for periodic interest payments and the return of the principal amount at maturity. As per the Companies Act 2013. debentures includes bonds.

3. Types of bonds Registered bonds Bearer bonds: payable to the holders of bonds Zero coupon bonds: Zero-Coupon Bonds: Zero-coupon bonds do not pay periodic interest. Instead, they are sold at a discount to their face value and mature at face value. The investor receives the return through the price appreciation over time. Junk bonds: Junk bonds, also known as high-yield bonds, are fixed-income securities issued by companies with lower credit ratings. These bonds have a higher risk of default compared to investment-grade bonds, which are issued by more creditworthy companies or governments.

4. 3. Public deposits Public deposits refer to funds that are deposited by individuals, including retail investors, with non-banking financial institutions (NBFIs) or companies. These deposits are a form of borrowing for the company and serve as a source of funds to meet their financing needs. Public deposits are typically unsecured, meaning they are not backed by any specific collateral.

5. c. Retained earnings Retained earnings are a portion of a company's net income that is not distributed to shareholders as dividends but is instead retained and reinvested in the business. Retained earnings represent the cumulative profits or net income that a company has earned since its inception, minus any dividends paid to shareholders.

6. advantages Dependable source of fund No explicit cost No floatation cost No fixed payment to suppliers of funds No dilution of control Bonus issue Increases financial strength of the firm

7. disadvantages Companies having adequate profit can use retained earnings Leads to concentration of economic power in few hands It involves opportunity cost

8. d. International Long term financing Foreign currency convertible bonds : FCCB stands for Foreign Currency Convertible Bond. It is a type of bond issued by a company in a foreign currency that can be converted into the company's equity shares at a predetermined conversion price. FCCBs combine the features of both debt and equity instruments, providing investors with the option to convert their bonds into company shares at a later date. Depository Receipts (DRs ) are financial instruments that represent ownership in a foreign company's shares and are traded on a stock exchange outside the company's home country. DRs allow investors to gain exposure to international companies without directly purchasing the underlying shares on a foreign exchange

9. Here are two common types of depository receipts: American Depositary Receipts (ADRs): ADRs are DRs traded in the United States and denominated in U.S. dollars. They are issued by U.S. depositary banks and represent shares of foreign companies. ADRs allow U.S. investors to invest in international companies without having to navigate foreign exchanges or currency conversions. Global Depositary Receipts (GDRs): GDRs are similar to ADRs but are traded outside the United States, typically in Europe or Asia. GDRs are typically denominated in U.S. dollars or another major currency. They allow investors in those regions to access international companies easily.

10. External commercial borrowings: E xternal Commercial Borrowings (ECBs) refer to loans or borrowings raised by eligible entities in a country from non-resident lenders or international financial institutions. ECBs are a means for companies, financial institutions, and even the government to access funds from foreign sources to finance their activities. Eurobonds are bonds denominated in a currency other than the currency of the country where the bond is issued. They are typically issued by multinational corporations, sovereign entities, or supranational organizations and are sold to investors in multiple countries.

11. 11. Short term sources of finance Trade credit : Trade credit refers to the practice of buying goods or services from a supplier on credit terms, allowing the buyer to make payment at a later date. It is a common form of short-term financing in which the supplier extends credit to the buyer, essentially acting as a creditor. Accrued expense : An accrued expense refers to an expense that a company has incurred but has not yet paid for or recorded in its financial statements. It represents an obligation to pay for goods or services that have been received or utilized, but the actual payment has not been made. Bank overdraft: A bank overdraft is a financial arrangement provided by a bank that allows an account holder to withdraw more money from their bank account than the available balance. It essentially enables the account holder to have a negative balance in their account, up to a predetermined limit

12. Cash credit : Cash credit is a type of short-term loan or credit facility provided by banks to businesses or individuals to meet their working capital needs. It allows borrowers to withdraw funds from a pre-approved credit limit as and when required, similar to a line of credit Discounting of bills of exchange : also known as bill discounting or bill negotiation, is a financial arrangement where a bank or financial institution purchases a bill of exchange from the holder before its maturity date at a discounted value. It provides immediate liquidity to the holder of the bill by converting it into cash before its actual payment date.

13. Factoring : Factoring is a financial transaction in which a business sells its accounts receivable (invoices) to a third-party financial institution, known as a factor, at a discount. The factor then assumes responsibility for collecting the outstanding receivables from the business's customers. Commercial papers (CPs) are short-term unsecured promissory notes issued by corporations, financial institutions, and government entities to raise funds for their short-term financing needs. They are typically issued to investors in the money market, who purchase them at a discount to their face value.

14. Certificate of deposits : A Certificate of Deposit (CD) is a financial instrument offered by banks and financial institutions that allows individuals or businesses to deposit funds for a fixed period at a specified interest rate. It is a time deposit that offers a higher interest rate compared to regular savings accounts in exchange for a commitment to keep the funds deposited for a specific duration. Inter-corporate deposits (ICDs) refer to the short-term loans or deposits made by one company to another company within the same corporate group or conglomerate. It involves the lending of funds from one entity to another within the same corporate structure, typically for short-term financing needs

15. Iii. Other sources of finance Securitization : Securitization is a financial process through which financial assets, such as loans, mortgages, or receivables, are pooled together and converted into tradable securities. These securities, known as asset-backed securities (ABS), are then sold to investors in the capital markets. Forfaiting : Forfaiting is a financing technique used in international trade to provide a medium- to long-term credit extension to exporters. It involves the sale of trade receivables, typically in the form of promissory notes or bills of exchange, to a forfaiter at a discount. The forfaiter assumes the risk of non-payment and provides immediate cash to the exporter

16. Hire purchase : Hire purchase (HP) is a financing arrangement that allows individuals or businesses to acquire an asset, typically a durable good such as a vehicle or equipment, through installment payments. The buyer takes possession of the asset immediately but makes regular payments to the financing company until the full purchase price, including interest, is paid off. Venture capital :Venture capital (VC) is a form of private equity investment in early-stage or high-growth companies with significant growth potential. Venture capital firms provide funding to these companies in exchange for an equity stake, aiming to generate a substantial return on their investment when the company becomes successful or goes public. Leasing : Leasing is a financial arrangement in which one party, known as the lessor, allows another party, known as the lessee, to use an asset in exchange for regular payments over a specified period. The lessor retains ownership of the asset while the lessee gains the right to use it