Borrowed Funds- Other sources- Part 2

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  • Q1

    Under the factoring arrangement, the factor

    Marks:1
    Answer:

    collects the client's debts.

    Explanation:
    Factoring has emerged as a popular source of short-term funds in recent years. It is a financial service whereby the factor is responsible for all credit control and debt collection from the buyer and provides protection against any bad-debt losses to the firm.
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  • Q2

    Under the lease agreement, the lessee gets the right to

    Marks:1
    Answer:

    use the asset for a specified period.

    Explanation:
    A lease is a contractual agreement whereby the owner of an asset (lessor) grants the right to use the asset to the other party (lessee). The lessor charges a periodic payment for renting of an asset for some specified period called lease rent.
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  • Q3

    In case of lease financing, the owner of asset is called the

    Marks:1
    Answer:

    lessor.

    Explanation:
    A lease is a contractual agreement whereby one party grants the other party the right to use the asset in return for a periodic payment. The owner of the assets is called the lessor while the party that uses the assets is known as the lessee.
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  • Q4

    Discuss the term 'international financing' and explain its financial instruments.

    Marks:6
    Answer:

    International financing means raising finances internationally. There are various sources and organisations to raise funds internationally.

    Followings are the main sources from where funds may be generated internationally:

    (i) Commercial Banks: Commercial banks all over the world provide foreign currency loans for business purposes. They are an important source of international financing. The types of loans and services provided by banks vary from country to country and bank to bank.

    (ii) International Agencies and Development Banks: These organisations provide long and medium term loans and grants to promote the development of economically backward areas in the world. These are set up by the Governments of developed countries of the world at national, regional and international levels for funding various projects. The main organisations working internationally are International Finance Corporation (IFC), EXIM Bank and Asian Development Bank.

    (iii) International Capital Markets: Modern organisations including multinational companies depend upon large borrowings in rupees and in foreign currency. For this purpose international capital markets have evolved. Main instruments used to raise funds internally in these markets are GDR, ADR and FCCB.

    The financial instruments used in international Financing are:

    • Global Depository Receipts: GDR is an instrument issued abroad by an Indian company to raise funds in some foreign currency, which is listed and traded on a foreign exchange. Hence, these are esentially Indian shares denominated in foreign currency. The holder of GDRs do not have any voting rights but only right to dividend and capital appreciation on shares.
    • American Depository Receipts: It is similar to GDRs except that it is denomnated in US Dollars and can be issued to American citizens only and can be listed and traded on a stock exchange of the USA. The depository receipts against shares of an Indian company issued in USA are called ADRs.
    • Foreign Currency Convertible Bonds: FCCBs are equity linked debt securities that are to be converted into equity receipts after a specific period. These are issued in foreign currency and carry a fixed rate of interest. They are similar to convertible debentures and they are listed and traded in foreign exchanges.

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  • Q5

    What is the maturity period of Commercial Papers?

    Marks:1
    Answer:

    The maturity period of commercial paper ranges from 90-364 days.

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