FINANCE STRATEGY- EXAM REVISION QUESTION Essay Example | Topics and Well Written Essays - 1000 words

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 â€Å"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