Investing, Borrowing, Chapter

and the Time Value

of Money 10

© 2013 Delmar/Cengage Learning. All Rights Reserved.

 Objectives
• Upon completion of this chapter, you will
be able to:
– Calculate the time value of money
– Discuss banking relationships and the effects
of financial market disruptions
– Describe prudent investment of cash
– Explain the types and uses of bank loans
– Describe the use of bonds for financings

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 Introduction
• Businesses rely on smooth operations of
the financial markets
• Businesses need to safely invest money
while retaining access to the money
• Borrowing may be needed when cash flow
is insufficient or for capital investments
• Large healthcare facilities need to use
investment professionals
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 The Time Value of Money
• Concept of interest: a dollar available
today is worth more than a dollar received
in the future
– The rate of interest reflects the future value
– The rule of 72 lets one estimate the number of
years for an investment to double in value
• Future value: what an amount of money
will be worth on a specified future date

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The Time Value of Money (cont’d.)
• Future value of a single sum

– The value of a lump sum invested at a fixed

rate of interest per period can be calculated
for any future number of periods

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© 2013 Delmar/Cengage Learning. All Rights Reserved.
The Time Value of Money (cont’d.)
• Present value of a single sum

– Tells how much to invest now at a particular

interest rate to reach a desired future value on
a specific date

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 Banking Relationships
• A large healthcare organization needs to
work with a commercial bank that will:
– Lend money at favorable terms
– Offer business checking accounts with
reasonable fees
– Pay competitive interest rates on short term
investments
– Provide good support to customers

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 Banking Relationships (cont’d.)
• A large healthcare organization will
prepare a Request for Proposal (RFP) that
states its banking needs
– RFP sent to competing banks that must write
detailed responses
– Responses reviewed and scored
– Existing bank customers contacted about their
satisfaction with bank services
– Best bank is chosen
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 Banking Relationships (cont’d.)
• A smaller medical facility may choose its
banks based on personal connections
• A bank typically assigns a relationship
manager to each business account
– Relationship manager needs to know financial
status of the medical facility
• A medical facility needs to keep current on
the financial status of its bank

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 Available Funds
• Money not immediately needed to meet
financial obligations should be invested
• Many investment choices:
• Corporate stocks
• Corporate or municipal bonds
• U. S. Treasury Bills and Notes
• Bank deposits with fixed maturity dates such as
Certificates of Deposit (CDs)

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 Available Funds (cont’d.)
• Investment decisions based on expected
future needs and how much risk medical
facility will accept
– Example: Corporate bonds pay higher interest
than U. S. Treasury Bills, but there is a risk
that the corporation will go bankrupt
– Three investment considerations: safety,
liquidity, and yield

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 Insufficient Cash Flow to Meet
Obligations
• Many medical facilities need to borrow
money to:
– Open or expand facilities or buy equipment
– Meet short term operating needs
• Borrowing sources for medical facilities:
– Commercial banks most commonly used
– Corporations can sell stock shares or bonds
– Government facilities can issue bonds

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 Insufficient Cash Flow to Meet
Obligations (cont’d.)
• Commercial bank loan types:
– Single payment loan
– Line of credit
– Terms loan
• Corporate and tax-free municipal bonds
– Bonds are promises to pay bond holder
interest and, at maturity, the original value
– Interest from corporate bonds is taxable

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 Insufficient Cash Flow to Meet
Obligations (cont’d.)
• Fixed rate and variable rate debt
– Loans and bonds can have fixed or variable
interest rates
– Variable rates usually tied to an index such as
the London InterBank Offered Rate (LIBOR)
• Corporate stock
– Stockholder owns a portion of the corporation
– Stocks traded on stock exchanges such as
the New York Stock Exchange
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 Summary
• Medical facilities need effective banking
relationships
• Funds not needed for operating expenses
should be invested with safety and liquidity
the top priorities
• Borrowing can be from commercial banks
– Corporations can sell bonds or stock
– Governments can sell tax-exempt bonds

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© 2013 Delmar/Cengage Learning. All Rights Reserved.