LESSON 3 – SUMMARY – TIME VALUE of MONEY Lease Factoring Overdraft Account Effective rate when interest is paid at the beginning of term Different Debt.

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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 13 FF - LFC/LG/LGM - 2Sem_2014/2015

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 15 FF - LFC/LG/LGM - 2Sem_2014/2015

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 FF - LFC/LG/LGM - 2Sem_2014/2015

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 FF - LFC/LG/LGM - 2Sem_2014/2015

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 18 FF - LFC/LG/LGM - 2Sem_2014/2015

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 21 FF - LFC/LG/LGM - 2Sem_2014/2015

EFFECTIVE RATE WHEN INTERST IS PAID AT THE BEGINNING OF TERM Example: Deposit of 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 = % > SAR of 2% 21 FF - LFC/LG/LGM - 2Sem_2014/2015

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 23 FF - LFC/LG/LGM - 2Sem_2014/2015

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 23 FF - LFC/LG/LGM - 2Sem_2014/2015

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: 23 FF - LFC/LG/LGM - 2Sem_2014/2015

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 - LFC/LG/LGM - 2Sem_2014/2015

DIFFERENT DEBT SERVICE: DEFERMENT Timeline of Cash Flows: Equation for the calculation of the Installment after the Deferment period: 23 FF - LFC/LG/LGM - 2Sem_2014/2015