inherent risk

The inherent risk in a potential business that would affect the debt holder’s capacity to repay the loan, hence affecting the lenders’ necessary returns. As a result, the larger the risk, the higher the interest rate (Gapenski, 2012).

Inflation has an impact on the future value of money. The higher the rate of inflation, the higher the interest rate required by savers. Similarly, when there is substantial inflation, lenders seek higher interest rates to compensate for the loss of purchasing power (Baker & Baker, 2013). A term loan is a contract under which the borrower makes a series principal and interest payments on specified dates to the lender. A term loan is directly negotiated between the lender or the financial institution and the borrowing business meaning that the investment bankers do not get involved. The maturity of a term loan is usually 3 to 15 years. Finally, a term loan is amortized in equal installments over the life of the loan (Baker & Baker, 2013).

Bond

A bond is a long-term contract in which the borrower agrees to pay to the holder of the principal amounts and the interest at specified dates. Unlike the term loans, the issue of a bond is registered with the Securities and Exchange Commission, advertised and offered to the public through the investment bankers. A bond can either be a corporate bond, a government/treasury bond or a municipal bond (Baker & Baker, 2013).

Line of Credit

A line of credit is a short-term loan from the bank which entails an agreement that specifies a maximum credit a bank can extend to a borrower over a predetermined period of time. A line of credit loan is paid as a lump sum plus the interest.

Municipal Bonds

Municipal bonds are long-term debt obligations which are issued by the states as well as their political subdivisions such as port authorities, cities and counties. They are used to finance capital projects. Municipal bonds are exempted from federal taxes as well as from most of the state taxes making them very attractive to people in high-income brackets (Gapenski, 2012).

8.3

Loan Agreement

A loan agreement is also known as a debt contract and explains the rights as well as the responsibilities of both lenders and borrowers. A debt contract is called an indenture are long and are made between the issuer and a bondholder (Gapenski, 2012). A promissory note is a short debt agreement and applies to debts other than bonds.

Restrictive Covenants

Restrictive covenants are provisions in the debt contract that are designed to protect creditors from managerial actions that would be detrimental to best of their interests (Gapenski, 2012).

Trustee

Trustee refers to a single voice that represents the interest of the bondholders. It is usually an institution such as a bank which ensures that the terms of the indenture are being complied with (Gapenski, 2012).

Call Provision

A call provision gives the issuer if a bond the right to call a bond for redemption before maturity (Gapenski, 2012). In other words, it allows an issuer to pay off the bondholders the full amount and redeem the issue.

8.6

Factors that healthcare managers should consider when setting a business’s target capital structure include inherent business risk, reserve borrowing capacity, lender and rating attitudes asset structure as well as industry averages (Gapenski, 2012).

References

Baker, J. J., & Baker, R. W. (2013). Health care finance. Jones & Bartlett Publishers.

Gapenski, L. C. (2012). Fundamentals of healthcare finance, 2nd ed. Chicago, IL: Health Administration Press. ISBN: 978-1567934755