Borrowing

can someone please list the advantages and disadvantages of the below three sources of funds for long term investment

1) term loan - bank loan

2) sale and lease back

3) deep discount bond

Please help, got my simulation this week and need to know

thanks

Comments

  • aj7861
    aj7861 Registered Posts: 62 ? ? ?
    someone help please:confused1:
  • SandyHood
    SandyHood Registered, Moderator Posts: 2,034
    Deep-Discount Bond
    What Does It Mean?
    What Does Deep-Discount Bond Mean?
    1. A bond that sells at a significant discount from par value.

    2. A bond that is selling at a discount from par value and has a coupon rate significantly less than the prevailing rates of fixed-income securities with a similar risk profile.
    Investopedia Says
    Investopedia explains Deep-Discount Bond
    1. Typically, a deep-discount bond will have a market price of 20% or more below its face value. These bonds are perceived to be riskier than similar bonds and are thus priced accordingly.

    2. These low-coupon bonds are typically long term and issued with call provisions. Investors are attracted to these discounted bonds because of their high return or minimal chance of being called before maturity.

    ref:
    http://www.investopedia.com/terms/d/deepdiscountbond.asp
    Sandy
    [email protected]
    www.sandyhood.com
  • SandyHood
    SandyHood Registered, Moderator Posts: 2,034
    Some companies will issue bonds where no interest is being offered (as we normally use the word "interest").
    So the investor might buy a 2020 bond today. If the bond was priced at £500 with a zero rate of interest payable, the company would not have to pay any cash until the redemption date.

    But how many investors would agree to pay £500 today to get £500 back in 11 years time?

    So the price that the bond sells for needs to be discounted. For this example, our company is offering to sell our £500 bond at a deep discount. Investors can by the bonds for £125. So effectively they will earn 13% p.a. on their money if they hold the bond until 2020.

    Our company benefits by not having any annual interest costs and by having the money now, and no obligation to repay until 2020. This money can then be tied up in a long-term asset.

    Our company suffers because such a financial instrument costs more in interest than many other sources of finance, to recompense the investors for lack of liquidity for a long period.
    Sandy
    [email protected]
    www.sandyhood.com
  • SandyHood
    SandyHood Registered, Moderator Posts: 2,034
    aj7861

    If you are asking for
    can someone please list the advantages and disadvantages of the below three sources of funds for long term investment

    1) term loan - bank loan
    because you have
    got my simulation this week and need to know

    Should you really be sitting your simulation at this time?

    I can appreciate that someone can study deep discounting and struggle to understand it. If something as fundamental as the pros and cons of a bank loan is an area you are not comfortable with, I would advise you to think twice about whether you are really ready for this simulation.
    Sandy
    [email protected]
    www.sandyhood.com
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