Financial Management: Investment Banking, Nominal Interest Rate, and Restrictive Covenants - Essay Example

Moyer et al. (2012) define an investment banker as a “financial middleman who brings together suppliers and users of long-term funds in the capital markets and thereby plays a key role in the security offering process.” An investment banker assists companies involved in mergers and acquisitions and also provides other services such as trading of derivatives, market making, fixed income instruments, and foreign exchange commodities. Investment bankers are non-deposit-taking financial institutions that advise on the issuance of bonds and securities.

A company would need to use an investment banker for a number of reasons: (i) they advise companies in the offering process(Initial Offering Process) in security issues timing and long-range financial planning, (ii) they recommend and execute strategies for a company’s merger with another, (iii) they assign an analyst to follow the company and provide research coverage,(iv) to benefit from funds since investment bankers furnish funds to the issuing company during the distribution period(when marketing the security issue), (v) investment bankers can assist companies by giving advice on the various sources of long-term funds, debt, and equity markets(Shim& Siegel,1998). Q2.What are the components of the nominal interest rate?

What do they pay for? When one puts money in a bank savings account, the bank pays some interest. This interest is known as the nominal interest rate. The nominal interest rate tells you how fast the number of pounds in your bank accounts rises over time-it is the actual rate of interest earned over time. Usually, when one takes a loan, the interest rate that appears on the loan agreement is the nominal interest rate. The nominal interest rate does not however; take into account the effects of compounding and inflation i.e. inflation rate has not been deducted from it so as to get the real interest rate (Stonecash et al.2011). The components of nominal interest rates are: (i) inflation rates/premium-this compensates the lender for the assumed erosion in the value of the money over the time period or the minimum a lender must receive on a loan in order to break- even in real terms, (ii) Real Rate-this compensates the lender for the economic use of the funds over the time period (Chisholm, 2009).

To understand better the Nominal interest concept, an example would suffice here. Supposing you buy a 1-year bond whose face value pays interest of 5% at the year-end. You pay $ 100 at the beginning of the year and you get $ 105 at the year-end. In this case, the bond interest is 5%. The 5% is the nominal interest rate since inflation is not accounted for. But assuming that the inflation rate in the year averaged 2%, then the Real interest rate (that which takes into account the inflation rate) is 3%.

This is arrived at using the equation shown below: Real Interest Rate(r) =Nominal Interest Rate (i) - Inflation Rate (π) The equation is known as Fisher Equation. Nominal interest rate can also be calculated using the formula below: Nominal interest Rate= (interest rate per period) (number of periods per year) A fully worked sum using the above formula is shown below: Assuming you invest some money in a bank where interest is calculated with monthly compounding periods at 3% per period. The nominal interest rate will be Nominal Interest Rate=3×12=36% Q3.

What are the restrictive covenants? Why do they matter to management? Businesses at times require protecting their legitimate commercial interests such as preventing certain senior employees from engaging in their trade or profession after employment. They do so by drafting clauses to that effect known as restrictive covenants. Restrictive covenants are specific types of promise included in a contract or agreement in which a person agrees to be restricted by the contract. It can also be referred to as a clause in a contract requiring a party to do or refrain from doing certain things.

There are three types of restrictive covenants. These are Non-Compete of Staff, on-solicitation and non-dealing clauses, and non-poaching clauses. The non-compete of staff clause prevents a key worker from setting up a competitive business within a defined area and over a set period of time. Non-Poaching of staff ensures that key personnel does not leave their employment after the departure of another key worker. Non-Solicitation and Non-Dealing Clauses bar the employee from actively contacting clients, employees, or suppliers with whom they have built contacts after they have left employment (“Restrictive Covenants,”n.d)