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Short term or working capital is money spent on business operations covering a period of a year or

less. Working capital is used to purchase inventory and to pay daily operating expenses such as wages and salaries, insurance premium, rent, and utilities. The demand for working capital can be enormous in large companies. Chrysler Corporation, for example has required as much as $50 million each working day. The second kind of capital is called long-term or fixed capital. This is money used to buy fixed assets, which are long lived and (with the exception of land) manufactured items that will be used to produce goods and services for several years. These fixed assets can be a microcomputer system to link all the departments in a textile plant of Burlington industries; computer-controlled robot welding machines for a ford motor company auto assembly line; or three new cargo jets for federal express. Unlike short term capital, which is used to sustain a company from one day to the next, long-term or fixed capital is spent for lasting improvements that will enhance a companys ability to produce goods or services superior to those of competitors, improve or expand its existing line of products, invent new products, or even to purchase the stock of other companies in one of the business combinations that you learned.

Short-term capital:
Short term or working capital (abbreviated WC) is a financial metric which represents operating liquidity available to a business, organization or other entity, including governmental entity. Along with fixed assets such as plant and equipment, working capital is considered a part of operating capital. Net working capital is calculated as current assets minus current liabilities. It is a derivation of working capital, that is commonly used in valuation techniques such as DCFs (Discounted cash flows). If current assets are less than current liabilities, an entity has a working capital deficiency, also called a working capital deficit.

Promissory Note
A promissory note is a negotiable instrument, wherein one party (the maker or issuer) makes an unconditional promise in writing to pay a determinate sum of money to the other (the payee), either at a fixed or determinable future time or on demand of the payee, under specific terms. Referred to as a note payable in accounting, or commonly as just a "note", it is internationally regulated by the Convention providing a uniform law for bills of exchange and promissory notes. Bank note is frequently referred to as a promissory note: a promissory note made by a bank and payable to bearer on demand.

Commercial paper
In the global money market, commercial paper is an unsecured promissory note with a fixed maturity of 1 to 270 days. Commercial paper is a money-market security issued (sold) by

large banks and corporations to get money to meet short term debt obligations (for example, payroll), and is only backed by an issuing bank or corporation's promise to pay the face amount on the maturity date specified on the note. Since it is not backed by collateral, only firms with excellent credit ratings from a recognized rating agency will be able to sell their commercial paper at a reasonable price. Commercial paper is usually sold at a discount from face value, and carries higher interest repayment rates than bonds. Typically, the longer the maturity on a note, the higher the interest rate the issuing institution must pay. Interest rates fluctuate with market conditions, but are typically lower than banks' rates.

Draft unlike a promissory note, which is a debtors promise to pay a debt, a draft is an instrument complete by a creditor ordering a debtor to pay a specific some of money. A draft that orders the debtor to pay the amount immediately is called a side draft: one that allows the debtor a certain time to produce the money is a time draft. A draft does not become a binding obligation until the debtor writes the word accepted on its face and signs it.

Figure: A sample form of Draft

A check is a document/instrument (usually a piece of paper) that orders a payment of money from a bank account. The person writing the check, the drawer, usually has a current account (most English speaking countries) checking account (US), orchequing account (CAN) where their money was previously 2

deposited. The drawer writes the various details including the money amount, date, and a payee on the check, and signs it, ordering their bank, known as the drawer, to pay that person or company the amount of money stated. Checks are a type of bill of exchange and were developed as a way to make payments without the need to carry large amounts of gold and silver. While paper money evolved from promissory notes, another form of negotiable instrument, similar to checks in that they were originally a written order to pay the given amount to whomever had it in their possession (the "bearer").

Buyer in Olympia

Seller in Tacoma

Buyers Bank

Cars on lot In Seattle

Figure: Transaction involving a Draft 1. Buyer and seller agree by telephone on the price of fifty cars stored in Seattle. 2. Tacoma seller sends draft to the buyers bank ordering the Olympia buyer to pay the agreed upon some. (car titles are attached to draft) 3. Bank officer notifies buyer when and titles arrived. 4. The buyer accepts the draft and pays the banker. 5. The banker detaches the titles, delivers them to the buyer, and sends payment to the seller after deducting a fee. 6. The buyer, titles in hand, picks up the cars at the Seattle lot.

Cashier's check
A cashier's check (cashier's checks, Banker's checks, bank checks, official checks, demand draft, teller's checks, bank draft or treasurer's checks) is a check guaranteed by a bank. They are treated as guaranteed funds and are usually cleared the next day. It is the customer's right to request "next-day availability" when depositing a cashier's check in person. Most banks do not clear them instantly. However, banks are permitted to take back money from a "cleared" check one or two weeks later if subsequent processing finds it to be fraudulent. Because customers believe the checks have been found valid and have been converted to cash in hand, customers are readily defrauded by schemes that ask them to part with goods or a portion of the money if it is cleared in a timely manner.

Certified check
A certified check or certified checks is a form of check for which the bank verifies that sufficient funds exist in the account to cover the check, and so certifies, at the time the check is written. Those funds are then set aside in the bank's internal account until the check is cashed or returned by the payee. Thus, a certified check cannot "bounce", and, in this manner, its liquidity is similar to cash, absent failure of the bank.

Institutions and methods of Short-Term Financing

(1) There are three main sources of short-term funds: trade credit (borrowing from suppliers), bank loans, and commercial paper (selling short-term debt securities in the open market).

(2) Trade credit is the largest single source of short-term funds for businesses, presenting approximately one-third of the current liabilities of nonfinancial corporations. (a) The terms "2/10, net 30" mean the buyer can take a 2% cash discount if payment is made within 10 days (the discount period); otherwise, the full amount is due within 30 days (the net period). (b) Trade credit (assuming you can get it) is more flexible than other means of short-term financing. The firm does not have to negotiate a loan agreement, pledge collateral, or adhere to a rigid repayment schedule.

(3) Firms can stretch accounts payable by postponing payment beyond the end of the net period.

(4) Commercial bank lending is second to trade credit as a source of short-term financing. (a) Commercial banks also provide intermediate-term financing (maturity between 1 and 10 years). (b) Short-term unsecured bank loans take one of three basic forms: a specific transaction loan, a line of credit, or a revolving credit.

(5) Bank term loans represent intermediate-term debt. It is a loan for a specified amount that requires the borrower to repay it according to a specified schedule.

(6) Firms that borrow by pledging receivables, inventories, or marketable securities can borrow more."

Short Term Financing

Short-term financing programs is designed to be repaid within a one-year period and is designed to meet the various needs of companies. Five types of short term financing are:

1. Purchase Order Financing - resellers can identify unusually large or unique purchase orders they receive from their customers and finance these specific transactions, thereby reserving their company's credit line for more typical transactions 2. Extended Terms Financing - permits resellers or end users to extend standard 30-day payment terms on their credit line for specific transactions to better manage their company's cash flow. 3. E-Rate Financing - provides financing for resellers who have an E-Rate financed contract with an educational institution. This assists in matching the E-Rate grant payment from the government with the purchase payment to the vendor. 4. Distribution Financing - available for qualified resellers and distributors to extend interest-free 45- and 60-day payments terms to better manage cash flow and company growth. 5. Accounts Receivable Financing - authorized resellers can establish a secured, revolving line of credit with advance rates up to 85% to assist in managing cash flow and company growth.

Long-Term Capital
The profit one realizes by selling a position one has held for longer than one year. For example, if one buys a stock or bond and sells it five years later for more than what one paid, this is considered a long-term capital gain. The government wishes to encourage long-term investment, and as such, longterm capital gains are usually entitled to preferential treatment for tax purposes; that is, they are taxed at a lower rate than most other income.

Retained earnings
In accounting, retained earnings refer to the portion of net income which is retained by

the corporation rather than distributed to its owners as dividends. Similarly, if the corporation takes a loss, then that loss is retained and called variously retained losses, accumulated losses or accumulated deficit. Retained earnings and losses are cumulative from year to year with losses offsetting earnings. Retained earnings are reported in the shareholders' equity section of the balance sheet. Companies with net accumulated losses may refer to negative shareholders' equity as a shareholders' deficit. A complete report of the retained earnings or retained losses is presented in the Statement of Retained Earnings or Statement of Retained Losses.

A security is generally a fungible, negotiable financial instrument representing financial value. Securities are broadly categorized into: debt securities (such as banknotes, bonds and debentures), equity securities, e.g., common stocks; and, Derivative contracts, such as forwards, futures, options and swaps.

The company or other entity issuing the security is called the issuer. A country's regulatory structure determines what qualifies as a security. For example, private investment pools may have some features of securities, but they may not be registered or regulated as such if they meet various restrictions. Securities may be represented by a certificate or, more typically, "non-certificated", that is in electronic or "book entry" only form. Certificates may be bearer, meaning they entitle the holder to rights under the

security merely by holding the security, or registered, meaning they entitle the holder to rights only if he appears on a security register maintained by the issuer or an intermediary. They include shares of corporate stock or mutual funds, bonds issued by corporations or governmental agencies, stock options or other options, limited partnership units, and various other formal investment instruments that are negotiable and fungible.

Common stock
Common stock is a form of corporate equity ownership, a type of security. The terms "voting share" or "ordinary share" are also used in other parts of the world; common stock being primarily used in the United States. It is called "common" to distinguish it from preferred stock. If both types of stock exist, common stock holders cannot be paid dividends until all preferred stock dividends (including payments in arrears) are paid in full. In the event of bankruptcy, common stock investors receive any remaining funds after bondholders, creditors (including employees), and preferred stock holders are paid. As such, such investors often receive nothing after a bankruptcy. On the other hand, common shares on average perform better than preferred shares or bonds over time. Common stock usually carries with it the right to vote on certain matters, such as electing the board of directors. However, a company can have both a "voting" and "non-voting" class of common stock.

Dividends are payments made by a corporation to its shareholder members. It is the portion of corporate profits paid out to stockholders When a corporation earns a profit or surplus, that money can be put to two uses: it can either be re-invested in the business (called retained earnings), or it can be distributed to shareholders. There are two ways to distribute cash to shareholders: share repurchases or dividends. Many corporations retain a portion of their earnings and pay the remainder as a dividend. For a joint stock company, a dividend is allocated as a fixed amount per share. Therefore, a shareholder receives a dividend in proportion to their shareholding. For the joint stock company, paying dividends is not an expense; rather, it is the division of after tax profits among shareholders. Retained earnings (profits that have not been distributed as dividends) are shown in the shareholder equity section in the company's balance sheet - the same as its issued share capital. Public companies usually pay dividends on a fixed 7

schedule, but may declare a dividend at any time, sometimes called a special dividend to distinguish it from the fixed schedule dividends.

Stock Dividend
Companies may decide to distribute stock to shareholders of record if the company's availability of liquid cash is in short supply. These distributions are generally acknowledged in the form of fractions paid per existing share. An example would be a company issuing a stock dividend of 0.05 shares for each single share held.

Preemptive Right
When shareholders, usually a majority shareholder or a shareholder committing large amounts of capital to a startup company, purchase shares, they want to ensure they have as much voting power in the future as they did when they initially invested in the company. By getting preemptive rights in its shareholder's agreement, the shareholder can ensure that any seasoned offerings will not dilute his/her ownership percentage.

A warrant is a security that entitles the holder to buy the underlying stock of the issuing company at a fixed exercise price until the expiry date. Warrants and options are similar in that the two contractual financial instruments allow the holder special rights to buy securities. Both are discretionary and have expiration dates. The word warrant simply means to "endow with the right", which is only slightly different from the meaning of option. Warrants are frequently attached to bonds or preferred stock as a sweetener, allowing the issuer to pay lower interest rates or dividends. They can be used to enhance the yield of the bond, and make them more attractive to potential buyers. Warrants can also be used in private equity deals. Frequently, these warrants are detachable, and can be sold independently of the bond or stock.

Stock Split

A corporate action in which a company's existing shares are divided into multiple shares called stock split. Although the number of shares outstanding increases by a specific multiple, the total dollar value of the shares remains the same compared to pre-split amounts, because no real value has been added as a result of the split.

Capital Appreciation'
Capital appreciation rise in the value of an asset based on a rise in market price. Essentially, the capital that was invested in the security has increased in value, and the capital appreciation portion of the investment includes all of the market value exceeding the original investment or cost basis. Capital appreciation is one of the two main sources of investment returns, with the other being dividend or interest income.

Financing with Bonds

A bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest (the coupon) to use and/or to repay the principal at a later date, termed maturity. A bond is a formal contract to repay borrowed money with interest at fixed intervals (semi annual, annual, sometimes monthly). Thus a bond is like a loan: the holder of the bond is the lender (creditor), the issuer of the bond is the borrower (debtor), and the coupon is the interest. Bonds provide the borrower with external funds to finance long-term investments, of or, in the case of government paper are bonds, to finance to current

expenditure. Certificates

deposit (CDs)

or commercial


be money

market instruments and not bonds.

Debt capital
Debt capital is the capital that a business raises by taking out a loan. It is a loan made to a company that is normally repaid at some future date. Debt capital differs from equity or share capital because subscribers to debt capital do not become part owners of the business, but are merely creditors, and the suppliers of debt capital usually receive a contractually fixed annual percentage return on their loan, and this is known as the coupon rate.

Debt capital ranks higher than equity capital for the repayment of annual returns. This means that legally, the interest on debt capital must be repaid in full before any dividends are paid to any suppliers of equity.

Bond Indenture
Bond indenture means a specific Blanket, unconditional contract between the bond issuer and the bond purchaser (bondholder) that specifies the terms of the bond. It states the interest rate (called coupon rate), the dates when the interest will be paid, maturity date(s), and other terms and conditions of the bond issue. Failure to meet the payment requirements calls for drastic penalties including liquidation of the issuer's assets.

Premiums are promotional itemstoys, collectables, souvenirs and household productsthat are linked to a product, and often require box tops, tokens or proofs to acquire. The consumer generally has to pay at least the shipping and handling costs to receive the premium. Premiums are sometimes referred to as prizes, although historically the word "prize" has been used to denote (as opposed to a premium) an item that is packaged with the product (or available from the retailer at the time of purchase) and requires no additional payment over the cost of the product.

Discounts and allowances

Discounts and allowances are reductions to a basic price of goods or services. They can occur anywhere in the distribution channel, modifying either the manufacturer's list price (determined by the manufacturer and often printed on the package), the retail price (set by the retailer and often attached to the product with a sticker), or the list price (which is quoted to a potential buyer, usually in written form). There are many purposes for discounting, including; to increase short-term sales, to move out-of-date stock, to reward valuable customers, to encourage distribution channel members to perform a function, or to otherwise reward behaviors that benefit the discount issuer. Some discounts and allowances are forms of sales promotion.

Sinking fund
A sinking fund is a fund established by a government agency or business for the purpose of reducing debt by repaying or purchasing outstanding loans and securities held against the entity. It helps keep the borrower liquid so it can repay the bondholder.


Face value
Face value is the nominal, or stated, amount of security. The face value of a bond is the amount the issuer agrees to pay upon maturity. Face value is also the amount upon which interest payments are determined.

A coupon is a ticket or document that can be exchanged for a financial discount or rebate when purchasing a product. Customarily, coupons are issued by manufacturers of consumer packaged goods or by retailers, to be used in retail stores as a part of sales promotions. They are often widely distributed through mail, coupon envelopes, magazines, newspapers, the Internet, directly from the retailer, and mobile devices such as cell phones. Since only price conscious consumers are likely to spend the time to claim the savings, coupons function as a form of price discrimination, enabling retailers to offer a lower price only to those consumers who would otherwise go elsewhere. In addition, coupons can also be targeted selectively to regional markets in which price competition is great.

Registered Bond
Register bond is a bond whose owner is registered with the bond's issuer. The owner's name and contact information is recorded and kept on file with the company, allowing it to pay the bond's coupon payment to the appropriate person. If the bond is in physical form, the owner's name is printed on the certificate. Most registered bonds are now tracked electronically, using computers to record owners' information.

Bond Types

Fixed rate bonds have a coupon that remains constant throughout the life of the bond. Zero-coupon bonds pay no regular interest. They are issued at a substantial discount to par value, so that the interest is effectively rolled up to maturity (and usually taxed as such). The bondholder receives the full principal amount on the redemption date. An example of zero coupon bonds is Series E savings bonds issued by the U.S. government. Zero-coupon bonds may be created from fixed rate bonds by a financial institution separating ("stripping off") the coupons from the principal. In other words, the separated coupons and the final principal payment of the bond may be traded separately. See IO (Interest Only) and PO (Principal Only).


Perpetual bonds are also often called perpetuities or 'Perps'. They have no maturity date. The most famous of these are the UK Consuls, which are also known as Treasury Annuities or Undated Treasuries. Some of these were issued back in 1888 and still trade today, although the amounts are now insignificant.

Bearer bond is an official certificate issued without a named holder. In other words, the person who has the paper certificate can claim the value of the bond. Often they are registered by a number to prevent counterfeiting, but may be traded like cash. Bearer bonds are very risky because they can be lost or stolen. Especially after federal income tax began in the United States, bearer bonds were seen as an opportunity to conceal income or assets. U.S. corporations stopped issuing bearer bonds in the 1960s, the U.S. Treasury stopped in 1982, and state and local taxexempt bearer bonds were prohibited in 1983.

Registered bond is a bond whose ownership (and any subsequent purchaser) is recorded by the issuer, or by a transfer agent. It is the alternative to a Bearer bond. Interest payments, and the principal upon maturity, are sent to the registered owner.

Treasury bond, also called government bond, is issued by the Federal government and is not exposed to default risk. It is characterized as the safest bond, with the lowest interest rate. A treasury bond is backed by the full faith and credit of the federal government. For that reason, this type of bond is often referred to as risk-free.

Pacific Railroad Bond issued by City and County of San Francisco, CA. May 1, 1865 Municipal bond is a bond issued by a state, U.S. Territory, city, local government, or their agencies. Interest income received by holders of municipal bonds is often exempt from the federal income tax and from the income tax of the state in which they are issued, although municipal bonds issued for certain purposes may not be tax exempt.