Business Finance Terms

Types of Corporate Debt Instruments

There are four main classes of long-term corporate debt instruments: Secured debt, Unsecured debt, Tax-exempt debt, and Convertible debt.

1. Secured debt: Secured debt is backed by specific assets. This backing reduces both the lenders’ risk and the interest rate they require. Mortgage bonds, collateral trust bonds, equipment trust certificates, and conditional sales contracts are the most common types of secured debt.

  • Mortgage Bonds: Mortgage bonds are secured by a lien on specific assets of the issuer. If the issuer defaults-fails to make a required payment of principal or interest-or fails to perform some other provision of the loan contract, lenders can seize the assets that secure the mortgage bonds and sell them to pay off the debt obligation.
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Capital Sources for Business: Bonds

A bond is a type of loan. Bonds are certificates of debt that is issued by a government or corporation in order to raise money with a promise to pay a specified sum of money at a fixed time in the future and carrying interest at a fixed rate. Generally, a bond is a promise to repay the principal along with interest (coupons) on a specified date (maturity). The main types of bonds are corporate bond, municipal bond, Treasury bond, Treasury note, Treasury bill, and zero-coupon bond. It is a tradable debt instrument that might be sold at above or below par (the amount paid out at maturity), and are rated by bond rating services to specify likelihood of default.… Read the rest

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Features of a Sound Capital Structure

Capital structure is a business finance term that describes ‘the proportion of a company’s capital, or operating money, which is obtained through debt and equity or hybrid securities’. Debt consists of loans and other types of credit that is to be repaid in the future, usually with interest. Equity involves ownership interest in a corporation in the form of common stock or preferred stock. Equity financing does not involve a direct obligation to repay the funds which is in contrast to debt financing. Instead, equity investors are able to exercise some degree of control over the company as they become part-owners and partners in the business.… Read the rest

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Accounts Receivable Management

Meaning of Accounts Receivables

When goods and services are sold under an agreement permitting the customer to pay for them at a later date, the amount due from the customer is recorded as accounts receivables; So, receivables are assets accounts representing amounts owed to the firm as a result of the credit sale of goods and services in the ordinary course of business. The value of these claims is carried on to the assets side of the balance sheet under titles such as accounts receivable, trade receivables or customer receivables. This term can be defined as “debt owed to the firm by customers arising from sale of goods or services in ordinary course of business.”… Read the rest

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Capital Sources for Business: Debentures

A debenture is a document issued by a company as an evidence of a debt due from the company with or without a charge on the assets of the company. It is an acknowledgement of the company’s indebtedness to its debenture-holders. Debentures are financial instruments for raising long term debt capital. Debenture holders are the creditors of the company.

In India, according to the Companies Act, 1956, the term debenture includes “debenture stock, bonds and any other securities of a company whether constituting a charge on the assets of the company or not.”

Debenture-holders are entitled to periodical payment of interest at an agreed rate.… Read the rest

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Capital Sources for Business: Preference Shares

Preference shares are those which carry priority rights in regard to the payment of dividend and return of capital and at the same time are subject to certain limitations with regard to voting rights.   The preference shareholders are entitled to receive the fixed rate of dividend out of the net profit of the company. Only after the payment of dividend at a fixed rate is made to the preference shareholders, the balance of profit will be used for paying dividend to ordinary shares. The rate of dividend on preference shares is mentioned in the prospectus. Similarly in the event of liquidation the assets remaining after payment of all debts of the company are first used for returning the capital contributed by the preference shareholders.… Read the rest

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