This lesson examines the debt funding sources and instruments available to organisations, including bank lending, bonds, and commercial paper.
5.1 Bank Lending
Bank lending is a primary source of debt funding. Key instruments include:
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Committed Facilities (Revolving Credit Facilities): A line of credit where the bank is legally obligated to provide funds. The ACT practice paper notes that “An RCF is a committed facility and hence there is certainty of funding” and that it “is more flexible as liquidity needs can be better matched to the business” .
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Uncommitted Facilities (Overdrafts): Flexible but not guaranteed. Fees include margin over a floating reference rate and commitment fees .
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Syndicated Loans: Loans provided by a group of banks, often transferable by the lender .
5.2 Bond Markets
Bonds are long-term debt securities. Key concepts include:
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Straight Bonds: Coupon paid on regular dates; nominal value of the bond repaid on a specified date .
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Zero Coupon Bonds: Earn their entire return on redemption .
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Eurobonds:Â A bond denominated in USD and issued outside the USAÂ .
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Medium Term Note (MTN) Programmes: Programmes that can use fixed or floating rates, with a pricing supplement setting out the terms of each issue; programmes have a credit rating .
5.3 Commercial Paper (CP)
Commercial paper is a short-term, unsecured promissory note issued by a corporation. The ACT practice paper notes that market returns are quoted at a discount rate, the day convention for issues is 365 days, and the secondary market is very liquid . A company issuing USD50m commercial paper at a discount rate of 1.8% for 181 days would receive approximately USD49,547,500 .
5.4 Debt Management in Treasury
The House of Training syllabus covers Loan and repayment types (including amortisation), interest types and calculation methods, debt instruments, and a zoom on syndicated loans and bond issues . The ACT’s DipTM Unit 1 requires candidates to “evaluate the range of debt funding sources that treasury could utilise” .