Principles of corporate finance 6th brealey myers chapter 32

Principles of Corporate Finance Brealey and Myers  Sixth Edition Short Term Lending and Borrowing Slides by Matthew Will Irwin/McGraw Hill Chapter 32 ©The McGraw-Hill Companies, Inc., 200 32- Topics Covered  Short-Term Lending  Money Market Instruments  Floating Rate Preferred Stock  Short Term Borrowing Irwin/McGraw Hill ©The McGraw-Hill Companies, Inc., 200 32- Sources of Short Term Financing  Money Markets  Commercial paper  Secured loans  Eurodollars Irwin/McGraw Hill ©The McGraw-Hill Companies, Inc., 200 32- Cost of Short-Term Loans Simple Interest annual interest rate Amount of loan X number of periods in the year Irwin/McGraw Hill ©The McGraw-Hill Companies, Inc., 200 32- Cost of Short-Term Loans Simple Interest annual interest rate Amount of loan X number of periods in the year Effective annual rate (1 + Irwin/McGraw Hill quoted annual interest rate n ) n - ©The McGraw-Hill Companies, Inc., 200 32- Cost of Short-Term Loans Discount Interest ( Face value of loan X - Irwin/McGraw Hill quoted annual interest rate number of periods in the year ) ©The McGraw-Hill Companies, Inc., 200 32- Calculating Yields Example In January of 1999, 91-day T-bills were issued at a discount of 4.36% Price of bill = 100 - 91/360 x 4.36 = 98.898 91-day return = (100 - 98.898) / 98.898 = 1.11% Annual return = 1.11 x 365/91 = 4.47% simple interest or (1.0111)365 / 91 - = 4.55% compound interest Irwin/McGraw Hill ©The McGraw-Hill Companies, Inc., 200 32- Money Market Investments  US Treasury Bills  Federal Agency Securities  Short-Term Tax-Exempts  Bank Time Deposits and CDs  Commercial Paper  Medium Term Notes  Bankers’ Acceptances  Repos Irwin/McGraw Hill ©The McGraw-Hill Companies, Inc., 200 32- Credit Rationing Example - Henrietta Ketchup Project Project Irwin/McGraw Hill Investments -12 -12 Payoff Prob of Payoff 15 24 or or ©The McGraw-Hill Companies, Inc., 200 32- 10 Credit Rationing Example - Henrietta Ketchup Project Project Irwin/McGraw Hill Expected Payoff to Bank 110 (.5x10) + (.5x0) = +5 Expected Payoff to Ms Ketchup 15 x (24-10) = +7 ©The McGraw-Hill Companies, Inc., 200 32- 11 Credit Rationing Example - Henrietta Ketchup Project Project Irwin/McGraw Hill Expected Payoff to Bank (.5x5) + (.5x0) = +2.5 Expected Payoff to Ms Ketchup 10 x (24-5) = +9.5 ©The McGraw-Hill Companies, Inc., 200 ... Inc., 200 32- Cost of Short-Term Loans Simple Interest annual interest rate Amount of loan X number of periods in the year Irwin/McGraw Hill ©The McGraw-Hill Companies, Inc., 200 32- Cost of Short-Term... Inc., 200 32- Credit Rationing Example - Henrietta Ketchup Project Project Irwin/McGraw Hill Investments -12 -12 Payoff Prob of Payoff 15 24 or or ©The McGraw-Hill Companies, Inc., 200 32- 10 Credit... Face value of loan X - Irwin/McGraw Hill quoted annual interest rate number of periods in the year ) ©The McGraw-Hill Companies, Inc., 200 32- Calculating Yields Example In January of 1999, 91-day