 Short Term Lending and Borrowing Principles of Corporate Finance Brealey and Myers Sixth Edition Slides by Matthew Will Chapter 32 © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill

© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill Topics Covered  Short-Term Lending  Money Market Instruments  Floating Rate Preferred Stock  Short Term Borrowing

© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill Sources of Short Term Financing  Money Markets  Commercial paper  Secured loans  Eurodollars

© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill Cost of Short-Term Loans Simple Interest

© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill Cost of Short-Term Loans Simple Interest Effective annual rate

© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill Cost of Short-Term Loans Discount Interest

© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill Calculating Yields Example In January of 1999, 91-day T-bills were issued at a discount of 4.36%. 1. Price of bill = /360 x 4.36 = day return = ( ) / = 1.11% 3. Annual return = 1.11 x 365/91 = 4.47% simple interest or (1.0111) 365 / = 4.55% compound interest

© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill 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

© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill Credit Rationing Example - Henrietta Ketchup

© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill Credit Rationing Example - Henrietta Ketchup

© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill Credit Rationing Example - Henrietta Ketchup