Financing Business

Which of the following attracts only interest but leaves the capital unpaid?

Antwortdetails

A bond is a financial instrument that represents a loan made by an investor to a borrower. In return for lending their money, the investor receives periodic interest payments and the promise of repayment of the principal amount at maturity. Out of the given options, the financial instrument that attracts only interest but leaves the capital unpaid is an **irredeemable bond**. An irredeemable bond, also known as a perpetual bond, is a type of bond that does not have a maturity date. This means that the issuer of the bond does not have the obligation to repay the principal amount to the investor at any point in the future. Instead, the issuer makes periodic interest payments to the investor for as long as the bond remains outstanding. These interest payments compensate the investor for lending their money, but the principal amount is never repaid. The main attraction of an irredeemable bond is that it provides a predictable stream of income in the form of interest payments. However, the investor is exposed to the risk that the bond issuer may default on the interest payments. Since the principal amount is not repaid, the investor does not have the potential for capital appreciation from the bond. In summary, an irredeemable bond attracts only interest payments but does not repay the principal amount.

(a) List Four sources of credit available to a sole trader. (b) Explain the following credit instruments: (i) acceptance credit; (ii) luncheon voucher; (iii) bill of exchange. (c) State two advantages and three disadvantages of hire purchase to the seller.

Antwortdetails

(a) Four sources of credit available to a sole trader are: 1. Trade credit: This is the credit extended by suppliers to the sole trader to purchase goods or services on credit, with a specified period to pay back the debt. 2. Bank loans: This involves borrowing money from banks to finance the business activities of the sole trader, with an agreement to repay the loan with interest over a specified period. 3. Personal savings: This involves using personal savings to finance the business activities of the sole trader, without incurring any interest charges. 4. Crowdfunding: This involves raising funds for the business activities of the sole trader from a large number of people through an online platform. (b) Explanation of credit instruments: (i) Acceptance credit: This is a type of credit where the seller draws a bill of exchange on the buyer, who accepts the bill by signing it. The buyer is then allowed to defer payment until the maturity of the bill, while the seller can discount the bill with the bank to obtain immediate payment at a reduced amount. (ii) Luncheon voucher: This is a type of credit instrument used to provide employees with subsidized meals during lunchtime. The vouchers are typically issued by the employer and can be redeemed at designated restaurants or canteens. (iii) Bill of exchange: This is a written document that orders the debtor to pay a certain amount of money to the creditor at a specified future date. It is a widely used instrument for financing trade transactions. (c) Advantages and disadvantages of hire purchase to the seller: Advantages: 1. It enables the seller to sell high-value items to customers who cannot afford to make full payment at once, thus increasing sales volume. 2. It provides a regular stream of income for the seller over the hire purchase period. Disadvantages: 1. The seller is exposed to credit risk, as there is a possibility that the buyer may default on payment. 2. The seller may incur administrative costs in managing the hire purchase agreement. 3. The seller may not receive the full value of the goods sold, as the interest charged on the hire purchase may reduce the overall revenue earned.