Finance 4412 Short Term Financial Management Topic Outline for Final Exam 1 Know the following the 3 main sources of firm financing how the effective interest rate on a bank line of credit is calculated interest cost commitment fee compensating balance requirement plus loan covenants that have to be satisfied the main short term investment alternatives for a firm e g sweep accounts commercial paper treasury securities and how the discount yield is computed applies to treasury securities commercial paper corporate bonds etc 1a Three main sources of firm financing are Commercial paper Bank loans and Corporate bonds 1b Effective interest rate Out of pocket expenses x 365 Value of usable funds days out of total borrowed borrowed Example A firm borrows 60 000 of its 100 000 bank line of credit Interest rate on used line 10 Out of pocket costs Interest cost 10 60 000 6 000 yr Commitment fee on unused portion 25BP 0025 Commitment fee 0025 100 000 60 000 0025 40 000 100 yr Banks require firms to hold a Demand Deposit Account compensating balance e g 20 of any borrowed amount may be held idle Compensating balance 20 60 000 12 000 held idle at bank Effective Interest 6 000 100 x 365 1271 12 71 10 stated Rate 60 000 12 000 365 interest rate Banks impose loan covenants that need to be met before the line of credit can be used e g if leverage x then no funds 1c Sweep Account Firm s excess collected Demand Deposit Account funds swept into interest earning investments overnight pay bank fees for this service Commercial paper high grade uncollateralized corporate debt Repurchase agreements Firm buys government securities from a bank to earn interest This gives the bank an overnight loan Bank buys back the securities the next day Around 10 of firm S T investments are REPOs 1d Discount Yield Instruments Treasury bills Commercial paper Bankers acceptances Computed Face value Market price Face value
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