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Please help me understand what happens when a company that took out the bank loan would be returning its debt back. For example, If we have taken out 10 years Loan of $1,000,000 (1m) from the bank on an interest rate of 5%, then we need to multiply the total amount $1,000,000 with the 5% to get the annual interest of $50,000 (1,000,000 * 5%) which we need to pay annually for the rest of 10 years which will be in a total of $500,000 at the end of 10 years period plus at the end of the period of 10 years we will have to return the principal amount of the loan of $1,000,000 to the BANK. So, the total amount that we are going to pay at the end of 10 year period is $1,500,000 ($500,000 of interest + 1,000,000 of principal amount)
Did I understand & calculate everything correctly SIR? Is there anything wrong!
Although the total paid will be $1,500,000, it will not all be paid at the end of 10 years.
They will pay the interest of $50,000 at the end of each year and pay $1,000,000 at the end of 10 years.
It might help you to watch the free Paper MA (was F2) lectures on interest and on investment appraisal.
Sir John, can you please also help me understand how the investors earn profit or loss on the sale of their shares?
If there is a share of ABC company currently trading at $10 in the stock exchange then this means that anybody can buy their shares at this quoted price of $10 BUT if somebody willing to pay me more than $10 let says $12 which will be a gain to the company of $2 [Is this correct?] But why would somebody pay the company more than what is currently trading at the stock market?
How can any company earn profit or loss on the sale of shares?
Secondly, If a debenture of $100 nominal value has the quoted market price of $95 or $110. What does that mean?
I can’t understand this!
The company doesn’t make profits from the sale of shares.
The stock exchange exists for individual investors to buy and sell shares to and from each other. If I own shares in a company then I can sell my shares to you and you then own shares in the company. Rather than have to find someone who wants to buy my shares off me, I do it through the stock exchange which is like a market – there are lots of people who want to sell shares and lots of other people who want to buy them.
If the shares are trading on the stock exchange at $10 then that is the price currently at which people are prepared to buy and sell shares to and from other people. Nobody is going to be prepared to pay you $12 if they can buy them for only $10 !! Maybe in a few weeks time the company is doing better and then people might be prepared to pay $12, in which case the share price on the stock exchange will change to $12.
If someone buys at one price today and then sells later when the price has changed, they will have made a profit or loss on the deal depending on whether the price is higher or lower when they sell them.
When the company first issues debentures they have a nominal value of $100 and this is what the company receives and is what they pay interest on each year. Anybody who owns debentures can sell the to other people if they want, and from then on it is the person who bought it who received the interest from the company (and the eventual repayment). Just as with shares, people buy and sell from each other via the stock exchange and the price at which they buy and sell changes from day to day and is the market value.
You must watch my free Paper FM lectures. They are a complete free course for Paper FM, cover everything needed to be able to pass the exam well, and explain everything relating to your questions.
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