FINANCE STRATEGY- EXAM REVISION QUESTION - Essay Example

This means that the repayment of the principal exceeds one year. The following are types of long-term debt Bonds – negotiable instruments that can be bought and sold like common stock, usually at units of $1,000 which is called its face or par value. It has a specified interest rate called coupon rate. Interest payments are usually paid at the end of each interest period, while the principal is paid at maturity. Debentures – This is a bond the only collateral of which is “the full faith and credit” of the company.

The loan is made only on the basis of the creditworthiness and credit rating of the debtor. Debentures are thus a form of unsecured credit and command a higher interest rate because of the higher risk. Mortgage Bonds – This is also a bond like the debenture, but it is secured by a specific collateral, usually a piece of real property. Mortgage bond lenders are thus secured lenders. Because of the security, interest rates are usually lower than debentures. Convertible Bonds – A type of debenture that may be converted to a share of stock at a later date.

This special feature allows for a relatively lower interest rate, because of the lower risk of default (the lender may elect to convert to common stock) i. Stock – An instrument that signifies an ownership position (the stock holder owns a portion of the company). A stockholder is entitle to rights of ownership of a business, such as the right to receive a portion of the profits, and the right to vote for the company’s board of directors, or for certain issues in the governance of the company. i. Efficient market hypothesis – Theory of Eugene Fama formulated in the sixties.

It states that the prices of stocks in the stock markets have taken all relevant information into consideration already – that is, prices discount all information – so that it is impossible to beat the market by trying to buy stocks at undervalued levels. Stock