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EIGHT
Sources of Short-Term
Financing
McGraw-Hill Ryerson
FIF T H
Foundations of Financial
Management
th
CANADIAN
PPT 8-1
EDI TI ON
Figure 8-1
Structure of corporate debt, 1998
35%
30%
25%
20%
15%
10%
5%
0%
Accounts
payable
Bank loans
Other short
term loans
Short term
paper
Bonds
Mortgages
Source: Statistics Canada, Financial St at ist ics for Enterprises, Catalogue 61-008XPB , 3rd quarter 1998
Block
Hirt
Short
McGraw-Hill Ryerson
FIF T H
th
CANADIAN
Foundations of Financial
Management
PPT 8-2
EDI TI ON
Figure 8-2
Prime interest rate movements
Block
Hirt
Short
McGraw-Hill Ryerson
FIF T H
Foundations of Financial
Management
th
CANADIAN
PPT 8-3
EDI TI ON
Figure 8-3
Corporate short-term paper outstanding
100
90
80
$ billions
70
60
50
40
30
20
10
0
Block
Hirt
Short
1 97 5
1 98 0
1 98 5
Bankers' acceptance s
1 99 0
1 99 5
1998
Commercial paper
McGraw-Hill Ryerson
FIF T H
Foundations of Financial
Management
th
CANADIAN
PPT 8-4
EDI TI ON
Figure 8-4
Comparison of commercial paper rate to bank prime rate*
20
18
16
14
percenta ge
12
10
8
6
4
2
Block
Hirt
Short
0
68
1970
1980
9 0 da y co mm ercia l pa per
McGraw-Hill Ryerson
1990
1998
P rime
McGraw-Hill Ryerson Limited 2000
FIF T H
th
CANADIAN
Foundations of Financial
Management
EDI TI ON
Chapter 8 - Outline
LT 8-1
Block
Hirt
Short
McGraw-Hill Ryerson
FIF T H
th
CANADIAN
Foundations of Financial
Management
EDI TI ON
LT 8-2
Block
Hirt
Short
McGraw-Hill Ryerson
FIF T H
th
CANADIAN
Foundations of Financial
Management
EDI TI ON
LT 8-3
Block
Hirt
Short
McGraw-Hill Ryerson
FIF T H
th
CANADIAN
Foundations of Financial
Management
EDI TI ON
LT 8-4
FIF T H
Block
Hirt
Short
th
CANADIAN
Foundations of Financial
Management
EDI TI ON
LT 8-5
Line of Credit:
company is able to draw upon a yearly borrowing
facility arranged in advance
revolving credits are for periods longer than 1 year
general purpose loans
Transaction Loan:
short-term loan for a specific purpose
Compensating Balance:
when a bank requires a minimum average account
balance in order to qualify for a loan
can be thought of as a form of collateral
less common than in the past
McGraw-Hill Ryerson
FIF T H
Block
Hirt
Short
th
CANADIAN
Foundations of Financial
Management
EDI TI ON
LT 8-6
Commercial Paper:
a short-term unsecured promissory note in minimum units of
$50,000
sold (at a discount) by finance companies, other large corporations
cheaper than bank loans
total amount of commercial paper outstanding has increased
greatly in recent years
Bankers Acceptances
to finance goods in transit (particularly imports)
sold at a discount
Eurodollar Loans:
loans from foreign banks denominated in Canadian dollars are
called Eurodollar loans (U.S Eurodollars predominate)
foreign interest rates may be lower
McGraw-Hill Ryerson
FIF T H
th
CANADIAN
Foundations of Financial
Management
EDI TI ON
LT 8-7
Block
Hirt
Short
McGraw-Hill Ryerson
FIF T H
th
CANADIAN
Foundations of Financial
Management
EDI TI ON
Inventory Financing
LT 8-8
Block
Hirt
Short
McGraw-Hill Ryerson
FIF T H
th
CANADIAN
Foundations of Financial
Management
EDI TI ON
Longer-term Loans
LT 8-9
Block
Hirt
Short
McGraw-Hill Ryerson