Investment Strategies: Bonds, Stocks, and Short-Term Financing

Posted on Jan 12, 2025 in Economy

Bonds

  • How do I return the invested capital?
    • Amortization of Capital: The total or partial cancellation of the debt that the bond issuer owes to the investor.
    • Revenue Payment: Relates to the interest paid on the bonds, known as coupons.
  • What risks are associated with bonds?
    • Price Risk: Buying the bond at one price and selling it when the price is lower.
    • Inflation Risk: The interest does not cover inflation.
    • Liquidity Risk: When you want to sell the bond, no one wants to buy it.
    • Default Risk: Failure to comply with the payments provided.
    • Currency Risk: The risk that the value of the currency of the bond decreases, resulting in a lower value than before.
  • What types of bonds are there?
    • Depending on who issues it: Public or private securities.
    • Depending on how your income is determined: Fixed-rate bonds or floating-rate bonds.
    • According to their duration: Short-term or long-term.
    • According to the form of payback: Using partial payments or a lump sum at the maturity of the bond.
  • What determines the price of a bond?
    • The credibility of the promise to pay.
    • The deadline for payment of the bond.
    • The interest rate of the coupons.
    • The interest rate market risk (country risk).

Stocks

What are dividends? Dividends are the share of the company’s profit that belongs to each shareholder.

What is the quoted price? It is the value that is paid on the stock market and depends on several factors that affect the supply and demand of the stock, such as:

  • Business situation
  • Retained earnings
  • Economic situation
  • Political situation
  • Industrial sector
  • Prospects
  • Market sentiment

What are the risks assumed by the investor?

  • Company risk, related to how the company operates.
  • Sector risk, related to the industry the company belongs to.
  • Market risk, related to the overall market where the company does business.

These three risks can be independent.

Sources of Short-Term Financing

Commercial Credit

  • Awarded by suppliers.
  • Arises from daily operations.
  • It is the least expensive way to obtain resources.
  • The conditions (time, amount, interest) are set by the creditor, based on the company’s history and the creditor’s opinion of it.

Promissory Note

  • Unconditional promise to pay.
  • Contains a commitment (signature of the debtor), a term, and a payment amount, plus any interest from the operation.
  • The creditor may or may not be designated.
  • It is a document supporting a debt, and its recovery may involve legal action.

Bank Credit

  • Awarded by the banks with which the company normally operates.
  • The bank establishes the conditions and requirements for granting the credit.
  • Interest rates vary according to the participants, but they are always significant.
  • Credit Line:
    • Pre-approved money that is always available at the bank.
    • Has deadlines and maximum amounts, including pre-established interest rates.
    • Granted by banks to their preferred customers but can be requested and negotiated.
    • Avoids having to negotiate for everyday needs.

Commercial Paper

  • Unsecured notes issued by large and important companies.
  • Only companies with experience and prestige can issue them.
  • More flexible conditions and lower interest rates than bank credit.
  • They are negotiable.

Accounts Receivable (Factoring)

  • A company gives a factor its rights on the accounts receivable from its customers in exchange for advance payment, minus a commission.
  • Collection cost savings for the company.

Inventory Financing

  • Inventory is used as collateral for a loan. The creditor has the right to take possession of it if the company fails to comply.
  • Articles are required to be durable, recognizable, and marketable at the prevailing market price.
  • Lower interest rates, but higher costs and risks.