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Dear Sir, I’m a self study student and I would be grateful if you could shed some light on the below definitions which I have collected from various sites on the WEB.
Question 1: Loan Stock V/S Stock
I understand that a loan stock is the shares kept as collateral to secure a loan. It is NOT a COUPON issued as it is the case for Bonds & Debentures. Correct?
Also, can we refer a loan stock as a loan taken from a bank for example?
Moreover, i understand that the word “stock” itself has a completely different meaning, these are the shares themselves, right?
Question 2: Loan Note V/S normal conventional loan
I understand that a loan note is a certificate of Dept or a promise to pay via a document including the conditions of payment (period, interest, dates , etc), but how does it differ from a normal loan? because in normal loans taken from the bank we pay interest and there is a period to pay.
Question 3: Loan note , Bonds and Debentures
I understand that all 3 are used to raised finance. That is they are DEPT instruments. But can a loan note be an EQUITY instrument? for example if it is raised for CAPITAL just like STOCK. (Shares) because i read that Loan notes cannot be traded as compared to Bonds and Debentures.
Question 4: Risk implications
If we want a hierarchy of the risk implication in case of a liquidation, is it correct to say that (starting from the safest) the following are paid in order of priority 1. Secured loans and bonds, 2. Debentures (with a floating charge) 3. Preference Shares 4. Ordinary shares 5. Unsecured loans and debentures.
Also, we we needed to chose from a secured loan and a secured bond which one is more secured?
Question 5. Tax implications
Bond and Debentures holders pay tax and the company paying the bond is NOT taxable, right?
All loans are tax deductible?Thank you
1. No – loan stock is exactly the same as bonds and debentures.
2. loan notes carry fixed interest and a repayment after a fixed period. That is not always the case with loans taken from the bank.
3. No – equity only refers to ordinary shares. Loan notes and bonds and debentures can all be traded on the stock exchange.
4. There is no difference between secured loans and secured bonds (unless of course they are secured on different assets).
5. Loans are never tax deductible!! What is deductible for tax is the interest on borrowings, whether or not they are loans or bonds or debentures. That fact that the owners of the bonds etc pay tax is of no relevance at all.
I really do suggest that you watch our free lectures! Our free lectures cover everything needed to be able to pass Paper F9 well.
thank u Sir, I’ll definitely watch the lectures, the above were just definitions I wanted to fine tune which i did not find in the lecture notes. One last question, so a normal loan can have a change in % interest during the course of the tenure? and a loan note / bond / debenture has a constant % interest throughout, right? Once again thank u very much for your support.
With regard to straight loans from the bank, it depends on the agreement when the loan is taken out – the interest may be variable or it may be fixed.
Bonds all always of fixed interest (the coupon rate) in the exam. In practice they can be variable but that is very rare.
(Don’t use the lecture notes on their own – they are notes to go with the lectures, and it is in the lectures that I explain and expand on the notes.)
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