FINS5512 Chap.5 Short-Term Debt Markets
Short-Term Debt Markets
Short-term debt includes tradeable discount securities and working-capital arrangements such as trade credit, overdrafts, inventory finance, receivables finance and factoring. The central calculation distinguishes investor yield, which uses purchase price, from discount rate, which uses face value.
The chapter also compares funding routes on effective cost, collateral, flexibility, liquidity and refinancing exposure rather than selecting the lowest headline rate. Preserve the day-count basis beside every annualised percentage and reverse calculation.
Build every short-term debt answer on a dated cash-flow line. At today, the investor pays price P; at maturity, the issuer pays face value F.
The positive difference is interest, but the annualised rate depends on its base. Investor yield divides by the amount invested, while discount rate divides by face value. Because P is below F for a positive return, yield is larger than the corresponding discount rate. Keep the day-count basis visible and round only after calculating the complete fraction. Instrument names then add credit and market structure.
A bank-accepted bill carries acceptance support, a promissory note is the issuer direct promise, and a negotiable certificate represents bank funding that can trade. Working-capital facilities shift the comparison beyond a single rate.
Trade credit may involve a costly discount foregone, an overdraft may reprice or be reviewed, inventory finance uses stock as support, and receivables finance or factoring depends on customer debts and contractual control of collections. Align the financing horizon with the business need, convert fees and discounts to a comparable basis, and state collateral, flexibility, liquidity and refinancing consequences.
The current checklist defines which discount-security calculation directions belong in scope, including price from yield and face value, face value from price and yield, yield and discount rate. Respect the excluded price-from-discount-rate boundary rather than extending a remembered formula into an unassigned method.
Use a reverse substitution to verify the quoted rate from the calculated price, and explain any difference caused by rounding or day-count convention. In a recommendation, identify whose credit supports the promise and how readily the claim can be sold before maturity.
What this chapter covers
- 01
Certificates of deposit, bills and promissory notes
- 02
Discount-security cash-flow direction
- 03
Price, face value and investor yield
- 04
Discount rate and its face-value denominator
- 05
Trade credit and early-payment discounts
- 06
Overdraft, inventory and receivables finance
Worked example · free
Find a discount-security purchase price
- +1Use face value = price × [1 + yield × days/365].
- +1The growth factor is 1 + 0.054 × 120/365.
- +1Price is $245,639.08.
- +1Dollar interest is $250,000 minus price, or $4,360.92.
Key terms
- Discount security
- A security bought below face value that pays face value at maturity.
- Investor yield
- The annualised return measured against the amount invested.
- Factoring
- A receivables-finance arrangement involving sale or administration of trade debts.
Short-Term Debt Markets FAQ
Why are yield and discount rate different?
They measure the same dollar gap against different bases. Investor yield uses the smaller purchase price because it measures return on money invested. Discount rate uses face value. For a positive discount, the yield is therefore larger.
What direction check applies to discount-security price?
With a positive required yield and a fixed maturity payment, the investor must pay less today than face value. If a calculation produces price above face value, inspect the sign, day fraction or denominator before accepting it.
How should short-term funding alternatives be compared?
Align the borrowing horizon and include fees, collateral, control, flexibility and refinancing exposure. Trade credit may sacrifice an early-payment discount, an overdraft can reprice or be reviewed, and receivables finance depends on asset quality and contractual terms.
Exam move
Place every discount-security problem on a two-date line. Write P as the cash paid today, F as the cash received at maturity and d as the days between them. Then identify whether the requested rate uses P or F in the denominator. Recalculate the result through substitution so the published answer can be checked from both directions.
Build a second comparison table for trade credit, overdrafts, inventory finance, accounts-receivable finance and factoring. Record effective cost, collateral, control of collections, flexibility and refinancing exposure. The current scope includes price from yield and face value, face value from price and yield, yield, and discount rate, while excluding price from a quoted discount rate.
Do not extend a formula beyond that boundary. For recommendation questions, describe the borrower's working-capital need first and match the facility's horizon. Finish with a direction statement: higher required yield lowers price when face value and maturity stay fixed.
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