Management and Organizational Studies 2275A/B Study Guide - Risk Premium, Cash Flow, Prime Rate

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Last Lecture 12/4/2012 10:58:00 AM
Banking, debtor and creditor law
55 questions, 2 hours long, questions evenly distributed per lecture
corporation’s advantage over other types: raise capital in two ways (equity
creditor and debtor relationship is a contractual relationship.
Shareholder and corporation: ownership/property (Rights and remedies)
Valid loan agreement: must contain all the elements of contract
typical business borrower and lender relationship? (example)
fixed term loan: loan with defined term. Repaid on blended periodic
installment payment of interest and principal. Double declining balance.
Collateral as security; long term assets (plant)
why aren’t they worried about the interest rate fluctuating?
fixed or floating interest rate—fixed because it’s a fixed term loan, meaning
they buy the money at today’s rate at prevailing PRESENT interest rate
therefore gain is already calculated regardless of the fluctuating interest rate
in the future.
Risk premium (fixed interest rate): prime rate plus x% (depends on the level
of the “risk” of the borrower) If, however, the “risk” of the borrower
increases, bank may risk losing money.
Cash flow gap, working capital, line of credit: no fixed principal
How do you pay interest on line of credit?: no principal repayment, monthly
repayment on interest for previous month. Floating rate: bank is exposed to
risk. Risk premium remains the same. Collateral for working capital? Pretty
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much whatever you have. Specifically… current assets: accounts receivable,
inventory, any CASH, etc. Weak covenance on operating line of credit
Confidence in management
debt service: will you have enough money to repay the loan?
Loan evaluation: valuation of collateral. Will the value of the collateral pay
off the loan? Both questions must be yes in order to receive the loan.
Banks get paid regardless of you succeed/fail. Banks cannot afford to lose
any money. (bank’s business model)
Risk reduction
- credit policies
- restructure
- guarantees (contract between guarantor and creditor; guarantor pays
the loan if the debtor defaults)
- security/collateral (mortgage/PPSA)
Security interest is property interest if debtor doesn’t repay, lender can
take the property and sell it. Security is impersonal property then it’s
- GSA (general security agreement)
PPSA (personal property security loan)
- Attachment (debtor has rights, value is given, debtor has signed S.A)
- Perfection (=attachment and registration; or possession)
- Priorities
- BOCB (buyer buys ordinary course of business?)
- PMSI (purchase money security interest) special kind of interest. loan
is purchase money? Loan is made to purchase stuff. 2 conditions to
satisfy: must be perfected and provide notice
Creditors must be commercially reasonable. Cannot be far less than
market value. Can sue for deficiency.
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