Management of receivables has been one of the major aspects of working capital management.
Thus, if a firm could contract out the collection of accounts receivable it would be saved fromadministration of sales ledger, collection of debt and the management of associated risk ofbad-debts, etc.
Factoring is a type of financial service which involves an outright sale of the receivables of afirm to a financial institution called the factor which specializes in the management of tradecredit. Under a typical factoring arrangement, a factor collects the accounts on the due dates,effects payments to a firm on these dates (irrespective of whether the customers have paid ornot) and also assumes the credit risks associated with the collection of the accounts.
4.41 Capital Markets:
Capital markets are financial markets for buying and selling of long-term debt- or equity-backedsecurities. The capital market and the stock exchange are considered the barometer of an economy.
A key division within the capital markets is between the primary markets and secondarymarkets. In primary markets, new stock or bond issues are sold to investors, often via amechanism known as underwriting.
The main entities seeking to raise long-term funds on theprimary capital markets are governments (which may be municipal, local or national) andbusiness enterprises (companies).
Capital market plays an extremely important role in promoting and sustaining the growth of an economy.
We shall study Capital Markets in depth, in the chapter on Capital Markets
4.42 Bond Markets:
The debt market is also known as the Bond market. It is a financial market whereparticipants can issue new debt, known as the primary market or buy and sell debt securities,known as the secondary market.
Debt instruments are contracts in which one party lends money to another on pre-determinedterms with regard to rate of interest to be paid by the borrower to the lender, the periodicity of- such interest payment, and the repayment of the principal amount borrowed.
4.43 Coupon rate:
Coupon Rate refers to the periodic interest payments that are made by the borrower to thelender and the coupons are stated upfront either directly specifying the rate (e.g.8.50%) orindirectly tying it with a benchmark rate.
4.44 Principal amount:
Principal is the amount that has been borrowed, and is also called the par value or facevalue of the bond.
4.45 Corporate Bonds:
These are bonds issued by a corporation. Corporate bonds often pay higherrates than government or municipal bonds, because they tend to be riskier.The bond holder receives interest payments (yield) and the principal, usually INR 1,000, on afixed maturity date (bonds can mature anywhere between 1 to 30 years). Generally,changes in interest rates are reflected in bond prices. Bonds are considered to be less riskythan stocks, since the company has to pay off all its debts (including bonds) before it handlesits obligations to stockholders.
4.46 Zero Coupon Bond:
In such a bond, no coupons are paid. The bond is instead issued at a discount to its facevalue, at which it will be redeemed. There are no intermittent payments of interest. When sucha bond is issued for a very long tenor, the issue price is at a steep discount to the redemptionvalue. Such a zero coupon bond is also called a deep discount bond.