Lecture 6 was really the commencement of our lectures on Investments. Lecture 1- 5 were really on the Financial Markets and in this lecture we start a series of 6 lectures on various topics on investments.
Debt v Equity
Here we start by explaining the difference between a debt and equity. In debt we do not participate in the risk of the business whilst in equity we do. You need to know the difference between the two. For many large organizations knowing the right balance between the amount of debt and the amount of equity makes the world of difference.
Debentures
A debenture is the document that evidences a debt just like shares evidence your equity. The issuance of a debenture is guarded by a set of rules of regulations design to ensure that the stakeholders are properly informed and protected.
Charges
A charge is legal mechanism designed to give lenders a way to secure their loan. A charge is taken on assets of a company pledged to the lender as security on the loan. Once pledged, it is intended that the lender has priority over the assets charged and the borrower unable to sell the assets or pledge the assets without first obtaining the lenders consent. Charges over the borrowers assets could include their real estate (these are referred to as mortgages and will be dealt with in the next lecture) or other fix assets (Fix charges) or they could also include charges over a class of assets that are constantly moving such as inventory in which case the law has created the floating charges to secure such transitory assets. It is important that you know the difference between the 2 and their relative priority an also the use of a Negative Pledge to further secure the interest of the lender. Try the link below - its quite a interesting write up on floating charges :
link http://en.wikipedia.org/wiki/Floating_charge
Guarantees
When a loan is dependent purely on guarantees - we say the loan is unsecured ie. with no security. A guarantee is a promise to pay in the event of a default. The law is however concerned in the event the guarantee is provided for by a third party with no economic interest in the loan. In certain cases such as wife's providing guarantees for the husbands loans, the law has imposed on the lender a higher degree of care in taking such guarantees. (Yerkey v Jones) It is ultimately the vulnerability of certain third party guarantors that the law seeks to ensure adequate protection from the bank who will always be keen to lend.
Guarantees
When a loan is dependent purely on guarantees - we say the loan is unsecured ie. with no security. A guarantee is a promise to pay in the event of a default. The law is however concerned in the event the guarantee is provided for by a third party with no economic interest in the loan. In certain cases such as wife's providing guarantees for the husbands loans, the law has imposed on the lender a higher degree of care in taking such guarantees. (Yerkey v Jones) It is ultimately the vulnerability of certain third party guarantors that the law seeks to ensure adequate protection from the bank who will always be keen to lend.
So week 6 is really about lending and the various types of security the lenders can have from secured charges over the fix assets to relatively weaker "security" by way of guarantees by third parties.
In week 7 we will be looking at the security over real estate.
Have a pleasant week and keep practising your tutorial questions.
SK
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