Financial Markets - Raising Capital Essay Example | Topics and Well Written Essays - 3000 words

Financial Markets - Raising Capital - Essay ExampleIn fact the financing decisions form an integral part of a firms policy decisions. Usually, the financial managers prefer debt over equity on account of interest tax deductibility and low cost associated with debt. Mr Exposito plans to have words funds for the purpose of expanding his wine maker personal line of credit. A careful analysis of the various sources of funding has been done to suggest the best available alternative based on the size of the winery business and the prevailing conditions in the market. Analysis of capital instruments There are two forms of financing - long term and short term. The long term financing instruments imply debentures, weds, term loans & shares and the short term debt instruments include bank overdraft & trade credit. Bonds- A bond is a long-dated financial instrument used by the companies to raise funds from the public. The bondholders are entitled to regular interest in the form of coupon p ayments. Normally, the bond is listed in the stock exchange. It has a inflexible date of matureness which is the date at which the comp some(prenominal) agrees to pay back the principal amount to the holder of the instrument. The issue of a bond creates a legal binding on the company. Even in the event of a loss the company cannot dishonour the interest payments as this can have legal repercussions. The companies mostly issue fixed coupons bonds offering semi-annual payments until the date of maturity. There may be other types of bonds like fluctuating coupon bonds or bonds with an annual or quarterly payment feature. excessively there are zero coupon bonds that do not require any interest payments. The bonds can further be classified on the keister of the collateral as mortgage bonds, collateral trust bonds and equipment trust certificates. The real property is used as collateral in the case of mortgage bonds. The securities own by the corpo set out act as a security for the col lateral trust bonds whereas the inventories and company equipments act as security for equipment trust certificates. The price of the bond is inversely proportional to the interest rate. A rise in the interest rate can lower the price of the bonds and vice versa. Considering the interest rate sensitivity the bonds can be of two types- callable and non callable bonds. If after a bond issue the interest rates fall in the market indeed the corporate can call back the bonds issued at a higher interest rate and issue new bonds at a lower rate of interest (Rini, 2002, p.57). Debentures- The features of debentures are more or less similar to that of bonds except that unlike bonds the debentures carry a pre-determined rate of interest. Depending on security the debentures can be classified as secured and unsecured. Secured debentures carry a charge on the company assets. The company cannot dispose-off these assets without the approval of the debenture holders. The unsecured debentures do n ot carry any such charge on the asset which makes it risky from the point of view of the investors. Again the debentures can be classified as per convertibility into convertible and non-convertible debentures. The former gets born-again into equity after a specified time period. Therefore in the future the debenture holders get an option to acquire a stake in the company. The non-convertible debentures are repaid at the end of the maturity and cannot be converted into equity. Depending on the payment pattern the debentures c