Credit

Front 1

What is the difference between a committed and uncommitted line of credit?

Back 1

Committed credit lines differ from uncommitted credit lines in that they legally bind the lender to provide the funds, rather than giving the lender the option of suspending or canceling the credit line based on market conditions.

Front 2

Define covenant

"Ka va nent"

Back 2

• Covenants are most often represented in terms of financial ratios which must be maintained for businesses which lend, such as a maximum debt-to-asset ratio or other such ratios.
• Covenants can cover everything from minimum dividend payments to levels that must be maintained in working capital to key employees remaining with the firm.
• Once a covenant is broken, the lender will typically have the right to call back the obligation from the borrower.
  

Front 3

Define "Nominal Interest Rate"

Back 3

• The interest rate before taking inflation into account.
  
• To avoid purchasing power erosion through inflation, investors consider the real interest rate, rather than the nominal rate.
  

Front 4

Define "Real Interest Rate"

Back 4

• An interest rate that has been adjusted to remove the effects of inflation to reflect the real cost of funds to the borrower, and the real yield to the lender.
  
• The real interest rate is the growth rate of purchasing power derived from an investment.
• By adjusting the nominal interest rate to compensate for inflation, you are keeping the purchasing power of a given level of capital constant over time.
  

Front 5

Define "Effective Annual Interest Rate"

Back 5

• An investment's annual rate of interest when compounding occurs more often than once a year.