1.  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

2. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill 32- 2 Topics Covered  Short-Term Lending  Money Market Instruments  Floating Rate Preferred Stock  Short Term Borrowing

3. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill 32- 3 Sources of Short Term Financing  Money Markets  Commercial paper  Secured loans  Eurodollars

4. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill 32- 4 Cost of Short-Term Loans Simple Interest

5. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill 32- 5 Cost of Short-Term Loans Simple Interest Effective annual rate

6. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill 32- 6 Cost of Short-Term Loans Discount Interest

7. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill 32- 7 Calculating Yields Example In January of 1999, 91-day T-bills were issued at a discount of 4.36%. 1. Price of bill = 100 - 91/360 x 4.36 = 98.898 2. 91-day return = (100 - 98.898) / 98.898 = 1.11% 3. Annual return = 1.11 x 365/91 = 4.47% simple interest or (1.0111) 365 / 91 - 1 = 4.55% compound interest

8. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill 32- 8 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

9. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill 32- 9 Credit Rationing Example - Henrietta Ketchup

10. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill 32- 10 Credit Rationing Example - Henrietta Ketchup

11. © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill 32- 11 Credit Rationing Example - Henrietta Ketchup