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Short term or working capital is money spent on business operations covering a period of a year or

less. Working capital is used to purchase inventory and to pay daily operating expenses such as wages and salaries, insurance premium, rent, and utilities. The demand for working capital can be enormous in large companies. Chrysler Corporation, for example has required as much as $50 million each working day. The second kind of capital is called long-term or fixed capital. This is money used to buy fixed assets, which are long lived and (with the exception of land) manufactured items that will be used to produce goods and services for several years. These fixed assets can be a microcomputer system to link all the departments in a textile plant of Burlington industries; computer-controlled robot welding machines for a ford motor company auto assembly line; or three new cargo jets for federal express. Unlike short term capital, which is used to sustain a company from one day to the next, long-term or fixed capital is spent for lasting improvements that will enhance a company’s ability to produce goods or services superior to those of competitors, improve or expand its existing line of products, invent new products, or even to purchase the stock of other companies in one of the business combinations that you learned.

Short-term capital:
Short term or working capital (abbreviated WC) is a financial metric which represents operating liquidity available to a business, organization or other entity, including governmental entity. Along with fixed assets such as plant and equipment, working capital is considered a part of operating capital. Net working capital is calculated as current assets minus current liabilities. It is a derivation of working capital, that is commonly used in valuation techniques such as DCFs (Discounted cash flows). If current assets are less than current liabilities, an entity has a working capital deficiency, also called a working capital deficit.

Promissory Note
A promissory note is a negotiable instrument, wherein one party (the maker or issuer) makes an unconditional promise in writing to pay a determinate sum of money to the other (the payee), either at a fixed or determinable future time or on demand of the payee, under specific terms. Referred to as a note payable in accounting, or commonly as just a "note", it is internationally regulated by the Convention providing a uniform law for bills of exchange and promissory notes. Bank note is frequently referred to as a promissory note: a promissory note made by a bank and payable to bearer on demand.

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Commercial paper is a money-market security issued (sold) by large banks and corporations to get money to meet short term debt obligations (for example. Figure: A sample form of Draft Check A check is a document/instrument (usually a piece of paper) that orders a payment of money from a bank account. the longer the maturity on a note. which is a debtors promise to pay a debt. and carries higher interest repayment rates than bonds. a draft is an instrument complete by a creditor ordering a debtor to pay a specific some of money. but are typically lower than banks' rates. orchequing account (CAN) where their money was previously 2 . Commercial paper is usually sold at a discount from face value. The person writing the check. Typically. Draft Draft unlike a promissory note. A draft that orders the debtor to pay the amount immediately is called a side draft: one that allows the debtor a certain time to produce the money is a time draft. commercial paper is an unsecured promissory note with a fixed maturity of 1 to 270 days. Since it is not backed by collateral.Commercial paper In the global money market. and is only backed by an issuing bank or corporation's promise to pay the face amount on the maturity date specified on the note. usually has a current account (most English speaking countries) checking account (US). payroll). the drawer. the higher the interest rate the issuing institution must pay. Interest rates fluctuate with market conditions. only firms with excellent credit ratings from a recognized rating agency will be able to sell their commercial paper at a reasonable price. A draft does not become a binding obligation until the debtor writes the word accepted on its face and signs it.

The buyer. Tacoma seller sends draft to the buyer’s bank ordering the Olympia buyer to pay the agreed upon some. and signs it. Checks are a type of bill of exchange and were developed as a way to make payments without the need to carry large amounts of gold and silver. While paper money evolved from promissory notes. The drawer writes the various details including the money amount. 2. (car titles are attached to draft) 3. Buyer and seller agree by telephone on the price of fifty cars stored in Seattle. delivers them to the buyer. another form of negotiable instrument. 3 . 4. and a payee on the check. The buyer accepts the draft and pays the banker. and sends payment to the seller after deducting a fee. 5. Bank officer notifies buyer when and titles arrived. 6. date. titles in hand. The banker detaches the titles. ordering their bank. similar to checks in that they were originally a written order to pay the given amount to whomever had it in their possession (the "bearer"). picks up the cars at the Seattle lot. known as the drawer. Buyer in Olympia Seller in Tacoma Buyers Bank Cars on lot In Seattle Figure: Transaction involving a Draft 1. to pay that person or company the amount of money stated.deposited.

bank loans. a certified check cannot "bounce". 4 . (a) The terms "2/10. They are treated as guaranteed funds and are usually cleared the next day. and. demand draft. However. Most banks do not clear them instantly. Because customers believe the checks have been found valid and have been converted to cash in hand. banks are permitted to take back money from a "cleared" check one or two weeks later if subsequent processing finds it to be fraudulent. bank draft or treasurer's checks) is a check guaranteed by a bank. net 30" mean the buyer can take a 2% cash discount if payment is made within 10 days (the discount period). Certified check A certified check or certified checks is a form of check for which the bank verifies that sufficient funds exist in the account to cover the check.Cashier's check A cashier's check (cashier's checks. or adhere to a rigid repayment schedule. presenting approximately one-third of the current liabilities of nonfinancial corporations. Banker's checks. its liquidity is similar to cash. customers are readily defrauded by schemes that ask them to part with goods or a portion of the money if it is cleared in a timely manner. otherwise. (2) Trade credit is the largest single source of short-term funds for businesses. in this manner. at the time the check is written. Those funds are then set aside in the bank's internal account until the check is cashed or returned by the payee. Institutions and methods of Short-Term Financing (1) There are three main sources of short-term funds: trade credit (borrowing from suppliers). bank checks. (b) Trade credit (assuming you can get it) is more flexible than other means of short-term financing. It is the customer's right to request "next-day availability" when depositing a cashier's check in person. Thus. teller's checks. and commercial paper (selling short-term debt securities in the open market). official checks. pledge collateral. the full amount is due within 30 days (the net period). absent failure of the bank. The firm does not have to negotiate a loan agreement. and so certifies.

5 . This assists in matching the E-Rate grant payment from the government with the purchase payment to the vendor. 4. Distribution Financing .permits resellers or end users to extend standard 30-day payment terms on their credit line for specific transactions to better manage their company's cash flow. (6) Firms that borrow by pledging receivables. Accounts Receivable Financing .resellers can identify unusually large or unique purchase orders they receive from their customers and finance these specific transactions. Five types of short term financing are: 1.and 60-day payments terms to better manage cash flow and company growth. inventories.(3) Firms can stretch accounts payable by postponing payment beyond the end of the net period. thereby reserving their company's credit line for more typical transactions 2. 5. Extended Terms Financing . 3." Short Term Financing Short-term financing programs is designed to be repaid within a one-year period and is designed to meet the various needs of companies. a line of credit. (5) Bank term loans represent intermediate-term debt. or a revolving credit. or marketable securities can borrow more. Purchase Order Financing . It is a loan for a specified amount that requires the borrower to repay it according to a specified schedule. (4) Commercial bank lending is second to trade credit as a source of short-term financing.available for qualified resellers and distributors to extend interest-free 45. E-Rate Financing . (b) Short-term unsecured bank loans take one of three basic forms: a specific transaction loan. (a) Commercial banks also provide intermediate-term financing (maturity between 1 and 10 years).authorized resellers can establish a secured.provides financing for resellers who have an E-Rate financed contract with an educational institution. revolving line of credit with advance rates up to 85% to assist in managing cash flow and company growth.

and. The government wishes to encourage long-term investment. A country's regulatory structure determines what qualifies as a security. retained earnings refer to the portion of net income which is retained by the corporation rather than distributed to its owners as dividends. but they may not be registered or regulated as such if they meet various restrictions. Securities are broadly categorized into:    debt securities (such as banknotes. e. negotiable financial instrument representing financial value. For example. equity securities. Retained earnings are reported in the shareholders' equity section of the balance sheet. For example.g. that is in electronic or "book entry" only form.Long-Term Capital The profit one realizes by selling a position one has held for longer than one year.. Companies with net accumulated losses may refer to negative shareholders' equity as a shareholders' deficit. this is considered a long-term capital gain. private investment pools may have some features of securities. if the corporation takes a loss. Derivative contracts. longterm capital gains are usually entitled to preferential treatment for tax purposes. accumulated losses or accumulated deficit. Retained earnings and losses are cumulative from year to year with losses offsetting earnings. common stocks. such as forwards. The company or other entity issuing the security is called the issuer. they are taxed at a lower rate than most other income. meaning they entitle the holder to rights under the 6 . if one buys a stock or bond and sells it five years later for more than what one paid. "non-certificated". Retained earnings In accounting. more typically. futures. Certificates may be bearer. options and swaps. and as such. Securities may be represented by a certificate or. Securities A security is generally a fungible. then that loss is retained and called variously retained losses. bonds and debentures). that is. Similarly. A complete report of the retained earnings or retained losses is presented in the Statement of Retained Earnings or Statement of Retained Losses.

stock options or other options. meaning they entitle the holder to rights only if he appears on a security register maintained by the issuer or an intermediary. For a joint stock company. a type of security. it is the division of after tax profits among shareholders. They include shares of corporate stock or mutual funds. For the joint stock company. a shareholder receives a dividend in proportion to their shareholding. creditors (including employees). bonds issued by corporations or governmental agencies. rather.the same as its issued share capital. It is called "common" to distinguish it from preferred stock. Public companies usually pay dividends on a fixed 7 . Therefore. or it can be distributed to shareholders. such investors often receive nothing after a bankruptcy. Dividends Dividends are payments made by a corporation to its shareholder members. or registered. Many corporations retain a portion of their earnings and pay the remainder as a dividend. However. It is the portion of corporate profits paid out to stockholders When a corporation earns a profit or surplus. common stock holders cannot be paid dividends until all preferred stock dividends (including payments in arrears) are paid in full. common stock being primarily used in the United States. common shares on average perform better than preferred shares or bonds over time. Common stock usually carries with it the right to vote on certain matters. paying dividends is not an expense. a dividend is allocated as a fixed amount per share. Retained earnings (profits that have not been distributed as dividends) are shown in the shareholder equity section in the company's balance sheet . such as electing the board of directors. a company can have both a "voting" and "non-voting" class of common stock. and various other formal investment instruments that are negotiable and fungible. that money can be put to two uses: it can either be re-invested in the business (called retained earnings). Common stock Common stock is a form of corporate equity ownership. As such. There are two ways to distribute cash to shareholders: share repurchases or dividends. On the other hand. and preferred stock holders are paid. limited partnership units.security merely by holding the security. common stock investors receive any remaining funds after bondholders. The terms "voting share" or "ordinary share" are also used in other parts of the world. In the event of bankruptcy. If both types of stock exist.

Warrant A warrant is a security that entitles the holder to buy the underlying stock of the issuing company at a fixed exercise price until the expiry date. allowing the issuer to pay lower interest rates or dividends. Frequently. Stock Split 8 . These distributions are generally acknowledged in the form of fractions paid per existing share. and make them more attractive to potential buyers. they want to ensure they have as much voting power in the future as they did when they initially invested in the company. sometimes called a special dividend to distinguish it from the fixed schedule dividends. these warrants are detachable. Preemptive Right When shareholders. Warrants can also be used in private equity deals. but may declare a dividend at any time. Stock Dividend Companies may decide to distribute stock to shareholders of record if the company's availability of liquid cash is in short supply. Warrants are frequently attached to bonds or preferred stock as a sweetener. purchase shares. the shareholder can ensure that any seasoned offerings will not dilute his/her ownership percentage. usually a majority shareholder or a shareholder committing large amounts of capital to a startup company.schedule. They can be used to enhance the yield of the bond. which is only slightly different from the meaning of option. An example would be a company issuing a stock dividend of 0. Both are discretionary and have expiration dates. By getting preemptive rights in its shareholder's agreement.05 shares for each single share held. Warrants and options are similar in that the two contractual financial instruments allow the holder special rights to buy securities. The word warrant simply means to "endow with the right". and can be sold independently of the bond or stock.

the total dollar value of the shares remains the same compared to pre-split amounts. and this is known as the coupon rate. and the coupon is the interest. depending on the terms of the bond. Thus a bond is like a loan: the holder of the bond is the lender (creditor). Although the number of shares outstanding increases by a specific multiple. termed maturity. to finance to current expenditure. in which the authorized issuer owes the holders a debt and. of or. in the case of government paper are bonds. Debt capital Debt capital is the capital that a business raises by taking out a loan. sometimes monthly). Essentially. is obliged to pay interest (the coupon) to use and/or to repay the principal at a later date. and the capital appreciation portion of the investment includes all of the market value exceeding the original investment or cost basis. the capital that was invested in the security has increased in value. and the suppliers of debt capital usually receive a contractually fixed annual percentage return on their loan. Capital appreciation is one of the two main sources of investment returns. the issuer of the bond is the borrower (debtor). Capital Appreciation' Capital appreciation rise in the value of an asset based on a rise in market price. but are merely creditors. A bond is a formal contract to repay borrowed money with interest at fixed intervals (semi annual. Bonds provide the borrower with external funds to finance long-term investments. annual. It is a loan made to a company that is normally repaid at some future date. Certificates deposit (CDs) or commercial considered be money market instruments and not bonds.A corporate action in which a company's existing shares are divided into multiple shares called stock split. because no real value has been added as a result of the split. 9 . with the other being dividend or interest income. Debt capital differs from equity or share capital because subscribers to debt capital do not become part owners of the business. Financing with Bonds A bond is a debt security.

Premiums are sometimes referred to as prizes. Bond Indenture Bond indenture means a specific Blanket. maturity date(s). collectables. the interest on debt capital must be repaid in full before any dividends are paid to any suppliers of equity. modifying either the manufacturer's list price (determined by the manufacturer and often printed on the package). although historically the word "prize" has been used to denote (as opposed to a premium) an item that is packaged with the product (or available from the retailer at the time of purchase) and requires no additional payment over the cost of the product. the dates when the interest will be paid. to encourage distribution channel members to perform a function. The consumer generally has to pay at least the shipping and handling costs to receive the premium. to increase short-term sales. There are many purposes for discounting. souvenirs and household products—that are linked to a product. unconditional contract between the bond issuer and the bond purchaser (bondholder) that specifies the terms of the bond. Premiums Premiums are promotional items—toys. or the list price (which is quoted to a potential buyer. It helps keep the borrower liquid so it can repay the bondholder. to move out-of-date stock. Sinking fund A sinking fund is a fund established by a government agency or business for the purpose of reducing debt by repaying or purchasing outstanding loans and securities held against the entity. Failure to meet the payment requirements calls for drastic penalties including liquidation of the issuer's assets. to reward valuable customers. including.Debt capital ranks higher than equity capital for the repayment of annual returns. tokens or proofs to acquire. 10 . or to otherwise reward behaviors that benefit the discount issuer. and often require box tops. and other terms and conditions of the bond issue. Some discounts and allowances are forms of sales promotion. Discounts and allowances Discounts and allowances are reductions to a basic price of goods or services. It states the interest rate (called coupon rate). usually in written form). the retail price (set by the retailer and often attached to the product with a sticker). They can occur anywhere in the distribution channel. This means that legally.

The bondholder receives the full principal amount on the redemption date. Face value is also the amount upon which interest payments are determined. using computers to record owners' information. The face value of a bond is the amount the issuer agrees to pay upon maturity. so that the interest is effectively rolled up to maturity (and usually taxed as such). or stated. An example of zero coupon bonds is Series E savings bonds issued by the U. The owner's name and contact information is recorded and kept on file with the company.Face value Face value is the nominal. newspapers. coupons are issued by manufacturers of consumer packaged goods or by retailers. Customarily. Coupon A coupon is a ticket or document that can be exchanged for a financial discount or rebate when purchasing a product. coupons function as a form of price discrimination. government. They are issued at a substantial discount to par value. and mobile devices such as cell phones. If the bond is in physical form. 11 . Since only price conscious consumers are likely to spend the time to claim the savings. the Internet. coupons can also be targeted selectively to regional markets in which price competition is great. amount of security. allowing it to pay the bond's coupon payment to the appropriate person.S. magazines. Zero-coupon bonds pay no regular interest. In addition. See IO (Interest Only) and PO (Principal Only). enabling retailers to offer a lower price only to those consumers who would otherwise go elsewhere. the owner's name is printed on the certificate. In other words. Bond Types   Fixed rate bonds have a coupon that remains constant throughout the life of the bond. directly from the retailer. Zero-coupon bonds may be created from fixed rate bonds by a financial institution separating ("stripping off") the coupons from the principal. Registered Bond Register bond is a bond whose owner is registered with the bond's issuer. to be used in retail stores as a part of sales promotions. Most registered bonds are now tracked electronically. the separated coupons and the final principal payment of the bond may be traded separately. They are often widely distributed through mail. coupon envelopes.

12 .  Treasury bond. U. In other words. For that reason. It is characterized as the safest bond. with the lowest interest rate. Especially after federal income tax began in the United States. CA. Interest income received by holders of municipal bonds is often exempt from the federal income tax and from the income tax of the state in which they are issued.  Registered bond is a bond whose ownership (and any subsequent purchaser) is recorded by the issuer. or their agencies. corporations stopped issuing bearer bonds in the 1960s. the person who has the paper certificate can claim the value of the bond. also called government bond. Perpetual bonds are also often called perpetuities or 'Perps'. city. which are also known as Treasury Annuities or Undated Treasuries. are sent to the registered owner. 1865 Municipal bond is a bond issued by a state. Treasury stopped in 1982. and state and local taxexempt bearer bonds were prohibited in 1983. Interest payments.S. local government. Pacific Railroad Bond issued by City and County of San Francisco. although the amounts are now insignificant. the U. A treasury bond is backed by the “full faith and credit” of the federal government. They have no maturity date. although municipal bonds issued for certain purposes may not be tax exempt. Often they are registered by a number to prevent counterfeiting. and the principal upon maturity.S. It is the alternative to a Bearer bond. bearer bonds were seen as an opportunity to conceal income or assets. The most famous of these are the UK Consuls. Some of these were issued back in 1888 and still trade today. Territory. is issued by the Federal government and is not exposed to default risk. or by a transfer agent. U.S. this type of bond is often referred to as risk-free.  Bearer bond is an official certificate issued without a named holder. but may be traded like cash. May 1. Bearer bonds are very risky because they can be lost or stolen.