LESSON 3 – SUMMARY – TIME VALUE of MONEY Lease Factoring Overdraft Account Effective rate when...
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Transcript of LESSON 3 – SUMMARY – TIME VALUE of MONEY Lease Factoring Overdraft Account Effective rate when...
LESSON 3 – SUMMARY – TIME VALUE of MONEY
Lease
Factoring
Overdraft Account
Effective rate when interest is paid at the
beginning of term
Different Debt Service:
Grace and Deferment
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C/LG
/LGM
- 2Sem
_20
14
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15
LEASE
- Type of Funding but distinct from the traditional loan because
it is agreed a Residual Value for the end of the Lease
- The LESSOR (Leasing company) owns the asset, personal or
real property, and grants the use of the object to the Lessee
- The LESSEE uses the object and pays a rent
- The rent can be monthly, quarterly, every six months or even
annual
- At the end of the contract there is a call option, that is, two
possibilities:
The Lessee intends to keep the asset and for that pays
the residual value to the lessor
The Lessee does not intend to keep the object and
returns it to the lessor
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FF - LF
C/LG
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- 2Sem
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LEASE
Being: B – value of the asset
Vr – agreed residual value (% of B, depending on the type of
asset)
R – rent
r – effective rate for the rent term
Basic Timeline and Cash Flows for the Lease:
Equation for the calculation of the Rent ( R ):15
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FACTORING
- Short-term type of funding that allows the anticipation of
receivables
- The Factoring Company (FACTOR) acquires the invoices
issued by a Company to its customers (Invoiced Party)
- In this process the FACTOR manages the receivables and the
creditworthiness of the invoiced party, advances most of the
invoiced amount to the Company immediately, charging a
percentage of that value for the services provided
- The FACTOR can provide a service of Credit Risk
management, leading the Company to always receive the
total invoiced amount even if the invoiced party ends up not
paying
- The great advantage of Factoring is the Receivables Term
reduction (quicker transformation in cash) and decrease in
administrative overheads. But it is not exactly a cheap form
of financing.....
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C/LG
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- 2Sem
_20
14
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OVERDRAFT ACCOUNT
- Flexible type of funding of continued support to the company's cash balance
with interest calculation on a daily basis in Simple Interest
- The overdraft account is characterized by the grant of a
maximum amount of credit for a specified period, and the
customer may, within the defined limits, use the respective
account in a flexible way (without subjection to a
predetermined plan)
- The opening of a current account with the overdraft is made
by a contract which establishes, inter alia, the maximum
credit limit, the term, the interest rate, the guarantees, the
obligations of the debtor, the conditions for cancelling the
facility
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EFFECTIVE RATE WHEN INTERST IS PAID AT THE BEGINNING OF TERM
- There is some offer of short-term loans or
applications in which it is established the
payment of the totality of the interest at the
beginning of the term of the contract
- This results in a calculated effective rate
higher than the stated rate offered
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C/LG
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- 2Sem
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EFFECTIVE RATE WHEN INTERST IS PAID AT THE BEGINNING OF TERM
Example:
Deposit of 20000 euros for 1 year at a stated
annual rate of 2% with interest paid at the
beginning
The timeline of Cash Flows is:
The equation for the calculation of AER is:
AER = 2.0408% > SAR of 2%
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- 2Sem
_20
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DIFFERENT DEBT SERVICE: GRACE and DEFERMENT
- In a financing with Grace the borrower only pays interest during the grace
period, that is, the debt service does not include any payment of the principal
during this period
- At the end of the Grace period, the amount of debt corresponds to the total
principal
- In a financing with Deferment the debtor does not make any debt service,
neither interest nor capital, during the deferment period
- At the end of the Deferment period, the amount of debt corresponds to the
total principal plus the accumulated interest
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- 2Sem
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DIFFERENT DEBT SERVICE: GRACE
GRACE PERIOD
Being,
E – principal
J – interest
n – number of periods of Grace
m – total number of periods of the loan
r – effective interest rate for the installment period
R – installment for principal and interest payment
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FF - LF
C/LG
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- 2Sem
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DIFFERENT DEBT SERVICE: GRACE
Timeline of Cash Flows:
Interest calculation:
J = E x r
Equation for the calculation of the Installment after de Grace Period:
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C/LG
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DIFFERENT DEBT SERVICE: DEFERMENT
DEFERMENT
Being,
E – principal
n – number of Deferment periods
m – total number of periods of the loan
r – effective interest rate for the Installment period
R – installment of principal and interest payment
23
FF - LF
C/LG
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- 2Sem
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14
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DIFFERENT DEBT SERVICE: DEFERMENT
Timeline of Cash Flows:
Equation for the calculation of the Installment after the Deferment period:
23
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C/LG
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- 2Sem
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14
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