DOCSLIB.ORG

Focusing the Uca Cash Flow Format on Lending Opportunities

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
Focusing the Uca Cash Flow Format on Lending Opportunities Cash Flow Analysis FOCUSING THE UCA CASH FLOW FORMAT ON LENDING OPPORTUNITIES Various spread systems may be used to track cash flow. This article focuses on an adaptation of one such system—Uniform Credit Analysis®—to a format that the author calls “lender’s cash flow,” which helps bring more light to lending opportunities. This format is shown using a real-life example. by James C. Miller n 1987, RMA moved credit analysis from the complex and often marginal financial situations, horse-and-buggy days of traditional net-profit-plus- which require a more formal and detailed analysis. depreciation cash flow to the jet-age Uniform Credit Indeed, they may be open to leaving their current AnalysisI ® (UCA) format, a variant on the Financial banks because their current lenders calculate cash Accounting Standards Board’s FASB95® cash flow flow off the top of their heads, which may result in format. The UCA format, which calculates real cash an opinion that is less accurate and less favorable flow, is probably the best thing RMA has done for than that of company management. I suggest that the lenders since it started collecting and publishing limitations of the widely used informal “eyeballing” comparable peer data. techniques are a disadvantage, because most com- However, over the years, experienced commercial mercial lenders face aggressive loan-growth goals and lenders at large and small banks have told me that the need a reasonably precise and easily used tool to UCA cash flow is ignored in certain situations. It is not help them identify lending opportunities quickly and required in some banks’ loan approval write-ups. It is avoid wasting time on candidates that ultimately end not used by some vendor programs, such as LaserPro® up being unsuitable. (which produces loan documents), that use net profit plus depreciation in lieu of the UCA cash flow. Most Lenders’ Cash Flow important, though, it is not used by some lenders who, To solve that problem, I suggest a reorganization instead, go directly to companies’ financial statements of the UCA/FASB95 format, which I’ll call lenders’ to make “eyeball” estimates using net profit plus cash flow (LCF). LCF focuses on and directly dis- depreciation. plays precisely the lending opportunities for which In my experience, such informal estimates work experienced lenders look. This reorganization of the best when the situation is simple and obvious, and UCA format is not the first to be suggested1, and it less well in complex and marginal situations. First, does not attempt to address subtle accounting or accurate cash-flow calculations can be too complex theoretical nuances for obscure kinds of companies. for most lenders to do off the top of their heads. However, I believe it is the first to result in a sim- Second, most financial statements show periods of ple, easily used format designed specifically to help only two years—not enough to establish the impor- commercial lenders in the real world focus quickly tant trends and patterns. Third, the customers most on lending opportunities. likely to leave one bank for another tend to have © 2006 by RMA. James Miller is a vice president at Wells Fargo Bank NA, in Phoenix, Arizona. 84 The RMA Journal April 2006 Focusing the UCA Cash Flow Format on Lending Opportunities What do experienced find net profits and then because these assets are what lenders look for? In general, mentally add back interest, the loan supports most of the lenders tell me they look for three taxes, depreciation, and time. They look at the mag- things in the financial statement: amortization. nitude and estimated change 1. Some approximation of cash 2. Lending opportunities in in these assets to get an idea flow for debt repayment, to receivables and inventory, of the size of any loans to cover the change. When you Figure 1 think about it, these elements New “Lending New “Lending constitute the asset part of Opportunities in New “EBITDA/ NOI Current UCA Format Opportunities in Receivables & Interest Coverage” the trading asset or working CAPEX” Inventory” capital cash cycle. Revenues Revenues 3. Lending opportunities in capi- Changes in Receivables Changes in tal expenditures by examining Receivables the size and changes in fixed Cost of Goods Sold COGS Changes in assets, i.e., the asset portion of Changes in Inventory Inventory the capital expenditures cash Changes in Trade Payables Changes in Trade Payables cycle (CAPEX). These lenders Changes in Costs/Billings >Bills/Costs know that financing fixed Other Operating Revenues & assets is a time-honored way to Non-Trade Receivables Operating build large interest-income- Expenses Operating Expenses generating outstandings quick- Changes in Operating Balance Sheet ly. Very savvy lenders have Items found that sometimes terming Cash Payments for Income Taxes out high-equity fixed assets Changes in Flooring Line provides the cash to solve Net Cash from Operations many business problems. Cash CPLTD Payments (Current Portion of Long-term Debt) Reorganizing UCA with Three New Cash Interest Payments Focused Sections Dividends Figures 1 and 2 show how I reorganized the UCA format to Cash After Debt Amortization create three new sections that Non-Operating Income (Expense) focus on and present what the Fixed Assets Changed Fixed Assets Changed lenders look for. Cash Used for Investments Interest coverage. For the Other Asset Transactions interest repayment income Changes in Intangibles stream, i.e., cash flow approxima- Asset Sales/Extraordinary tion, I chose interest, taxes, Changes in Short-term Bank Debt Changes in Short- depreciation, and amortization term Bank Debt Changes in Long-term Debt Changes in (EBITDA) and accordingly Long-term Debt Changes in Subordinated Debt moved revenues, cash cost of sales, and cash operating expens- Changes in Other Liabilities and Affiliated Liabilities es to a section called New Changes in Other Liabilities & Gray Area “EBITDA / NOI Interest Changes in Net Worth Coverage.” I chose EBITDA, sometimes referred to as net oper- Net Change in Cash ating income (NOI), over the alter- Beginning Cash natives for four reasons: Net Change in Cash 1. It closely resembles the quick Ending Cash mental calculations experi- 85 Figure 2 neous items and put them into the proposed LCD in a Remaining UCA Proposed Lenders’ Cash Flow (LCF) Sources and Uses section. In actu- Operating Cash Flow Interest Coverage al practice, this section proves very Lending Opportunities in useful in tying up loose ends and Receivables & Inventory Miscellaneous Operating Cash Flow answering some questions that arise from the other sections. Debt Coverage Debt Coverage How It Works Investing Cash Flow Lending Opportunities in CAPEX Figures 3 and 4 show an exam- Financing Cash Flow Remaining Sources & Uses ple from real life. Figure 3 contains the income statement for the last enced commercial lenders CAPEX. Finally, I isolated the year and the balance sheet for two make and that, in actual prac- major elements that capture the periods, i.e., what is required to cal- tice, tend to be quickly CAPEX cash cycle—i.e., the culate cash flow. Figure 5 shows the accepted. changes in fixed assets and the cash flow derived from Figures 3 2. It has long been recognized changes in the long-term debt and 4 with the existing UCA format that interest repayment comes that should fund most of the in the two columns to the left and from the profits earned on the growth in fixed assets—and the proposed Lenders’ Cash Flow sale of the assets funded by moved them to a new section, in the two columns to the right. bank debt and that principal Lending Opportunities in Capital Notice that the existing UCA for- repayment comes from the liq- Expenditures (CAPEX). mat and the Lenders’ Cash Flow uidation of the funded asset. use identical line items and identi- Other Items. Remaining Well, EBITDA is the appro- cal Cash After Operations and Cash items in the Operating Cash Flow priate income stream that cov- After Debt Amortization figures. ers the interest portion. section of the UCA format include 3. There is widespread accept- miscellaneous operating cash flow EBITDA / NOI Interest ance2 of EBITDA in the gen- elements—mostly cash payments Coverage. Let’s start at the top eral financial community, for income taxes. I grouped these section in Figure 7, EBITDA / including commercial lenders line categories together in NOI Interest Coverage, the and prospective customers, so Miscellaneous Operating Cash Lenders’ Cash Flow format lets bankers and borrowers usual- Flow. In actual practice, moving us look at the cash flow approxi- ly speak the same language. these items out of Lending mation section. In this case, the 4. All the line items needed for Opportunities in Receivables and Lenders’ Cash Flow presented calculation are already present Inventory allowed for clearer focus the $11.8 million in revenues and in the existing UCA format. on the trading assets cash cycle. In then subtracted $6.994 million in addition, collecting these items in cash costs of sales3 and $3.970 Lending Opportunities in this new section made it easier to million in cash operating Receivables & Inventory. Next, examine them and catch anom- expenses4. The result was I isolated the major elements that alous amounts that influenced EBITDA, or NOI, of $846,000. capture the trading asset cash cash flow. This EBITDA covered $284,000 cycle, i.e., changes in receivables I left intact the classic UCA in interest 2.9 times. My experi- and inventory, the changes in Debt Coverage section, which ence is that this is strong for any trade payables, and the short-term includes the Cash After Operations kind of company. bank debt that funds those oppor- (CAO) and the Cash After Debt Normal EBITDA does not tunities.
Load more

Recommended publications
  • Analysis of Cash Flow Ratios: a Study on CMC
    Accounting 4 (2018) 41–52 Contents lists available at GrowingScience Accounting homepage: www.GrowingScience.com/ac/ac.html Analysis of cash flow ratios: A study on CMC Somnath Dasa* aAssistant Professor of Commerce, Rabindra Mahavidyalaya, Champadanga, Hooghly – 712401, India C H R O N I C L E A B S T R A C T Article history: Cash flow ratios help financial users get relevant information about financial resources for a Received January 9, 2017 given time. Cash flow ratios are now used more than the traditional ones because it is more Received in revised format effective and justified. Cash flow based ratios are especially surprising because they do not January 11 2017 only play a significant role in the credit rating of evaluation, but also forecast the failure of a Accepted March 7 2017 Available online corporation. In this study, we perform an empirical investigation on a company named CMC. March 7 2017 From the study, it is clear that the liquidity and solvency positions of the company were moderate whereas the company maintained low profitability. On the other hand, the efficiency Keywords: Liquidity and sufficiency ratios of the study give us a new look on financial judgement. Solvency Profitability Efficiency Sufficiency Ratios © 2017 Growing Science Ltd. All rights reserved. 1. Introduction Information related to cash flow helps financial statement users receive the relevant information concerning the use and source of financial resources over a given time period (Rose et al., 2007). Cash flow statement contains information associated with operating, investing purposes of financial analysis, because the effect of the traditional ratio analysis techniques has been well established in literature, and financial activities (Macve, 1997).
    [Show full text]
  • 14. Calculating Total Cash Flows
    Chapter 2 Lecture Problems 14. Calculating Total Cash Flows. Greene Co. shows the following information on its 2008 income statement: Sales = $138,000 Costs = $71,500 Other expenses = $4,100 Depreciation expense = $10,100 Interest expense = $7,900 Taxes = $17,760 Dividends = $5,400. In addition, you're told that the firm issued $2,500 in new equity during 2008, and redeemed $3,800 in outstanding long-term debt. a. What is the 2008 operating cash flow? b. What is the 2008 cash flow to creditors? c. What is the 2008 cash flow to stockholders? d. If net fixed assets increased by $17,400 during the year, what was the addition to NWC? a. To calculate the OCF, we first need to construct an income statement. The income statement starts with revenues and subtracts costs to arrive at EBIT. We then subtract out interest to get taxable income, and then subtract taxes to arrive at net income. Doing so, we get: Income Statement Sales $138,000 Costs 71,500 Other Expenses 4,100 Depreciation 10,100 EBIT $52,300 Interest 7,900 Taxable income $44,400 Taxes 17,760 Net income $26,640 Dividends $5,400 Addition to retained earnings 21,240 Page 1 Chapter 2 Lecture Problems Dividends paid plus addition to retained earnings must equal net income, so: Net income = Dividends + Addition to retained earnings Addition to retained earnings = $26,640 – 5,400 Addition to retained earnings = $21,240 So, the operating cash flow is: OCF = EBIT + Depreciation – Taxes OCF = $52,300 + 10,100 – 17,760 OCF = $44,640 b.
    [Show full text]
  • HIGH YIELD OR “JUNK' BONDS, HAVEN OR HORROR by Mason A
    HIGH YIELD OR “JUNK’ BONDS, HAVEN OR HORROR By Mason A. Dinehart III, RFC A high yield, or “junk” bond is a bond issued by a company that is considered to be a higher credit risk. The credit rating of a high yield bond is considered “speculative” grade or below “investment grade”. This means that the chance of default with high yield bonds is higher than for other bonds. Their higher credit risk means that “junk” bond yields are higher than bonds of better credit quality. Studies have demonstrated that portfolios of high yield bonds have higher returns than other bond portfolios, suggesting that the higher yields more than compensate for their additional default risk. It should be noted that “unrated” bonds are legally in the “junk” category and may or may not be speculative in terms of credit quality. High yield or “junk” bonds get their name from their characteristics. As credit ratings were developed for bonds, the credit agencies created a grading system to reflect the relative credit quality of bond issuers. The highest quality bonds are “AAA” and the credit scale descends to “C” and finally to “D” or default category. Bonds considered to have an acceptable risk of default are “investment grade” and encompass “BBB” bonds (Standard & Poors) or “Baa” bonds (Moody’s) and higher. Bonds “BB” and lower are called “speculative grade” and have a higher risk of default. Rulemakers soon began to use this demarcation to establish investment policies for financial institutions, and government regulation has adopted these standards. Since most investors were restricted to investment grade bonds, speculative grade bonds soon developed negative connotations and were not widely held in investment portfolios.
    [Show full text]
  • Understanding Alpha Versus Beta in High Yield Bond Investing
    PERITUS ASSET MANAGEMENT, LLC Market Commentary Independent Credit Research – Leveraged Finance – July 2012 Understanding Alpha versus Beta in High Yield Bond Investing Investors have come to recognize that there is a secular change occurring in financial markets. After the 2008 meltdown, we have watched equities stage an impressive rally off the bottom, only to peter out. There is no conviction and valuations are once again stretched given the lack of growth as the world economy remains on shaky ground. In another one of our writings (“High Yield Bonds versus Equities”), we discussed our belief that U.S. businesses would plod along, but valuations would continue their march toward the lower end of their historical range. So far, this looks like the correct call. Europe still hasn’t been fixed, the China miracle is slowing and, perhaps, the commodity supercycle is also in the later innings. The amount of debt assumed by the developed world is unsustainable so deleveraging began a few years ago. These are not short or pleasant cycles and both governments and individuals will be grumpy participants in this event. It simply means that economic growth will be subdued for years to come. I have never really been able to understand economic growth rates that are significantly ahead of the population growth anyway…oh yeah, the productivity miracle. I have written chapter and verse on the history of financial markets and where returns have come from: yield. Anyone with access to the internet can verify that dividends, dividend growth and dividend re-investment are what have driven stock returns over the decades.
    [Show full text]
  • Foundations of High-Yield Analysis
    Research Foundation Briefs FOUNDATIONS OF HIGH-YIELD ANALYSIS Martin Fridson, CFA, Editor In partnership with CFA Society New York FOUNDATIONS OF HIGH-YIELD ANALYSIS Martin Fridson, CFA, Editor Statement of Purpose The CFA Institute Research Foundation is a not- for-profit organization established to promote the development and dissemination of relevant research for investment practitioners worldwide. Neither the Research Foundation, CFA Institute, nor the publication’s editorial staff is responsible for facts and opinions presented in this publication. This publication reflects the views of the author(s) and does not represent the official views of the CFA Institute Research Foundation. The CFA Institute Research Foundation and the Research Foundation logo are trademarks owned by The CFA Institute Research Foundation. CFA®, Chartered Financial Analyst®, AIMR- PPS®, and GIPS® are just a few of the trademarks owned by CFA Institute. To view a list of CFA Institute trademarks and the Guide for the Use of CFA Institute Marks, please visit our website at www.cfainstitute.org. © 2018 The CFA Institute Research Foundation. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the copyright holder. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional should be sought.
    [Show full text]
  • GGD-89-48 High Yield Bonds
    GAO Iteport, to Congressional Rcqueskrs -..- ~--. .--- March 1!))I!) HIGH YIELD BONDS Issues Concerning Thrift Investments in High Yield Bonds i ,I unitedstates General Accounting Office GAO Wahington, D.C. 20548 General Government Division B-231276.8 March 2, I989 The Honorable Donald W. Riegle Chairman, Committee on Banking, Housing and Urban Affairs United States Senate The Honorable Henry B. Gonzalez Chairman, Committee on Banking, Finance and Urban Affairs House of Representatives This report completes our responseto the requirements of Section 1201 of the Competitive Equality Banking Act of 1987 (P.L. lOO-86),which directed us to study several aspects of the high yield bond market As required by the act, we did our work in consultation with the Securities and Exchange Commission, the Federal Home Loan Bank Board, the Comptroller of the Currency, the Board of Governors of the Federal ReserveSystem, the Federal Savings and Loan Insurance Corporation, the Federal Deposit Insurance Corporation, the Secretary of the Treasury, and the Secretary of Labor. Copies of this report are being provided to those agenciesand are available to others on request. This report was prepared under the direction of Craig A. Simmons, Director, Financial Institutions and Markets Issues, Other major contributors are listed in the appendix. Richard L. Fogel Assistant Comptroller General Ekecutive Summ~ The growth of the high yield (“junk”) bond market in the 1980s has Purpose been fraught with controversy. Numerous congressionalhearings have focused on the role of these bonds as a tool to finance takeovers-of com- panies. Major figures in the high yield bond market have been the target of investigations by congressionalcommittees, the Securities and Exchange Commission, and the Justice Department.
    [Show full text]
  • Cash Flow BCAS 18: Cash Flow
    BANGLADESH COST ACCOUNTING STANDARDS BCAS - 18 Cash Flow BCAS 18: Cash Flow BCAS 18: Cash Flow 18.1 Introduction Cash flow in a company is a very important issue from managerial perspective. Forecasting cash flows are very important for decision making purposes. Reporting cash flow related information for internal decision making process receives extra attention along with external reporting. At the same time, management of cash flows on a regular basis is an important task of treasury now-a- days. The firms need to maintain a delicate balance between holding too much cash resulting into sacrifice of profitable investment opportunities and too little cash triggering unnecessary borrowing to support daily transactions. The purpose of this standard is to consider issues in developing and using cash flow information from a forward looking perspective. Sometimes it has been observed that in spite of adequate profit in business, they are unable to meet their taxes and dividends, just because of shortage of cash. Improving cash flow is a smart move for any business. It does not matter how great the business model is, how profitable it is, or how many investors the business has lined up. The business cannot survive if it fails to manage its cash properly. Given these trends, it is becoming increasingly important that cash flow information be prepared in a consistent and reliable manner. 18.2 Objectives The standard provides a basic guideline on forecasting cash inflows and outflows, reporting of cash flow related information, analyzing cash flow data and using cash flow data in different typical situations. The standard also highlights the importance of generating accurate cash flow information timely which is very important for cash flow management.
    [Show full text]
  • Learn Debits and Credits
    LEARN DEBITS AND CREDITS Written by John Gillingham, CPA LEARN DEBITS AND CREDITS Copyright © 2015 by John Gillingham All rights reserved. This book or any portion thereof may not be reproduced or used in any manner whatsoever without the express written permission of the publisher except for the use of brief quotations in a book review. TABLE OF CONTENTS Introduction .................................................................................................... 6 More Resources .............................................................................................. 7 Accounting Play – Debits & Credits ......................................................... 7 Accounting Flashcards ............................................................................ 7 Free Lessons on Podcast and Downloads ................................................ 8 Intro to Debits and Credits .............................................................................. 9 Debits and Credits Accounting System .................................................... 9 The Double Entry System ........................................................................11 Different Account Types..........................................................................12 Debits and Credits Increases and Decreases ...................................................15 Increases and Decreases .........................................................................15 Debits and Credits by Account ................................................................16
    [Show full text]
  • Financial Ratios Ebook
    The Corporate Finance Institute The Analyst Trifecta Financial Ratios eBook For more eBooks please visit: corporatefinanceinstitute.com/resources/ebooks corporatefinanceinstitute.com [email protected] 1 Corporate Finance Institute Financial Ratios Table of Contents Financial Ratio Analysis Overview ............................................................................................... 3 What is Ratio Analysis? .......................................................................................................................................................................................................3 Why use Ratio Analysis? .....................................................................................................................................................................................................3 Types of Ratios? ...................................................................................................................................................................................................................3 Profitability Ratio .......................................................................................................................... 4 Return on Equity .................................................................................................................................................................................................................5 Return on Assets .................................................................................................................................................................................................................6
    [Show full text]
  • Accounting Standards Update 2019-02
    No. 2019-02 March 2019 Entertainment—Films—Other Assets—Film Costs (Subtopic 926-20) and Entertainment— Broadcasters—Intangibles—Goodwill and Other (Subtopic 920-350) Improvements to Accounting for Costs of Films and License Agreements for Program Materials a consensus of the FASB Emerging Issues Task Force An Amendment of the FASB Accounting Standards Codification® The FASB Accounting Standards Codification® is the source of authoritative generally accepted accounting principles (GAAP) recognized by the FASB to be applied by nongovernmental entities. An Accounting Standards Update is not authoritative; rather, it is a document that communicates how the Accounting Standards Codification is being amended. It also provides other information to help a user of GAAP understand how and why GAAP is changing and when the changes will be effective. For additional copies of this Accounting Standards Update and information on applicable prices and discount rates contact: Order Department Financial Accounting Standards Board 401 Merritt 7 PO Box 5116 Norwalk, CT 06856-5116 Please ask for our Product Code No. ASU2019-02. FINANCIAL ACCOUNTING SERIES (ISSN 0885-9051) is published monthly with the exception of February, March, May, and October by the Financial Accounting Foundation, 401 Merritt 7, PO Box 5116, Norwalk, CT 06856-5116. Periodicals postage paid at Norwalk, CT and at additional mailing offices. The full subscription rate is $297 per year. POSTMASTER: Send address changes to Financial Accounting Series, 401 Merritt 7, PO Box 5116, Norwalk, CT 06856- 5116. | No. 481 Copyright © 2019 by Financial Accounting Foundation. All rights reserved. Content copyrighted by Financial Accounting Foundation may not be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the Financial Accounting Foundation.
    [Show full text]
  • Amortization of Discounts on Certain Acquired Loans; Practice Bulletin, 06 American Institute of Certified Public Accountants
    University of Mississippi eGrove American Institute of Certified Public Accountants Guides, Handbooks and Manuals (AICPA) Historical Collection 1-1-1989 Amortization of discounts on certain acquired loans; Practice bulletin, 06 American Institute of Certified Public Accountants. Accounting Standards Executive Committee;American Institute of Certified Public Accountants. Amortization of Discounts Task Force Follow this and additional works at: https://egrove.olemiss.edu/aicpa_guides Part of the Accounting Commons, and the Taxation Commons Recommended Citation American Institute of Certified Public Accountants. Accounting Standards Executive Committee;American Institute of Certified Public Accountants. Amortization of Discounts Task Force, "Amortization of discounts on certain acquired loans; Practice bulletin, 06" (1989). Guides, Handbooks and Manuals. 193. https://egrove.olemiss.edu/aicpa_guides/193 This Article is brought to you for free and open access by the American Institute of Certified Public Accountants (AICPA) Historical Collection at eGrove. It has been accepted for inclusion in Guides, Handbooks and Manuals by an authorized administrator of eGrove. For more information, please contact [email protected]. Practice Bulletin August 1989 6 Amortization of Discounts on Certain Acquired Loans Accounting Standards Executive Committee and Amortization of Discounts Task Force AICPA______________________________ ___ American Institute of Certified Public Accountants NOTICE TO READERS Practice bulletins of the Accounting Standards Division
    [Show full text]
  • Corporate Bonds
    investor’s guide CORPORATE BONDS i CONTENTS What are Corporate Bonds? 1 Basic Bond Terms 2 Types of Corporate Bonds 5 Bond Market Characteristics 7 Understanding the Risks 8 Understanding Collateralization and Defaults 13 How Corporate Bonds are Taxed 15 Credit Analysis and Other Important Considerations 17 Glossary 21 All information and opinions contained in this publication were produced by the Securities Industry and Financial Markets Association (SIFMA) from our membership and other sources believed by SIFMA to be accurate and reli- able. By providing this general information, SIFMA is neither recommending investing in securities, nor providing investment advice for any investor. Due to rapidly changing market conditions and the complexity of investment deci- sions, please consult your investment advisor regarding investment decisions. ii W H A T A R E C O R P O R A T E BONDS? Corporate bonds (also called “corporates”) are debt obligations, or IOUs, issued by privately- and publicly-owned corporations. When you buy a corpo- rate bond, you essentially lend money to the entity that issued it. In return for the loan of your funds, the issuer agrees to pay you interest and to return the original loan amount – the face value or principal - when the bond matures or is called (the “matu- rity date” or “call date”). Unlike stocks, corporate bonds do not convey an ownership interest in the issuing corporation. Companies use the funds they raise from selling bonds for a variety of purposes, from building facilities to purchasing equipment to expanding their business. Investors buy corporates for a variety of reasons: • Attractive yields.
    [Show full text]