Loan - What is it? classification, people involved, and more

Loan - What is it? classification, people involved, and more
Posted on 13-03-2022

Loan

Form of raising money used by the States and private companies.

What is a loan?

A loan is a form of raising money, used by the States and private companies, which consists of the issuance of bonds, obligations, promissory notes, or other titles acquired by the public as a way of investing their savings and investment capital.

The loan arises from the need to obtain amounts of money to finance productive activities, both in the private sector and in the public sector and in the States, with the aim of financing budget deficits or shortages.

Taking into account that loans require large sums of money, the principal amount is divided into proportional parts called obligations, which allow the money to be distributed among several people called lenders.

With this figure, companies and States obtain medium and long-term loans with which they manage to finance new investments, while investor lenders obtain interest as a means of remunerating the investment made.

Classification of loans

According to the payment of interest or coupons

Depending on the payment of interest or coupons, the types of loans can be:

  • Expired coupon: when the payment is made at the end of each period. It is the most frequent modality.
  • Zero-coupon: in this category, no interest is paid at any time during the duration of the obligation, but rather the accrued interest is received at final maturity.

According to the form of amortization

Depending on the form of amortization, the types of loans can be:

  • Single total amortization: when all the obligations are amortized in a single opportunity.
  • Amortization by lottery: when the amortization is made several times but on each occasion, the obligations to be amortized are decided by lottery.
  • Amortization by nominal reduction: when the amortization of the obligations is carried out several times but not completely, but rather a part of the obligations is amortized and the nominal value of each title is progressively reduced.
  • Perpetual debt: they are generally loans issued by the States. In them there is no amortization commitment, only interest is paid.
  • Amortization due to purchase on the stock market: occurs when the issuer withdraws the securities from circulation through direct purchase on the stock market.

According to the issue value of the debentures

In this category, each obligation has an amount or face value C, but can be issued at a different price V:

  • Emission at par: occurs when there is equality in the V=C values.
  • Under par emission: occurs when V<C. In these cases, the difference between the nominal amount C and the value V is called the issue premium.
  • Emission over par: occurs when V>C.

According to the redemption value of the obligations

Depending on the repayment value of the obligations, the types of loans can be:

  • Reimbursement for the nominal: characterized in that the nominal amount of the obligation is returned. Most frequent mode.
  • Redemption with amortization premium: when the issuer returns the nominal amount and an additional amount is delivered.
  • Reimbursement by lot: occurs when the issuing entity delivers an additional amount but said amount is distributed by lottery among all redeemable titles and in a given lot.

People involved in a loan

The people involved in a loan are the following:

  • The borrower: issuer of the loan, the entity that issues the titles to the market to obtain the financing.
  • The lender: also called a bondholder, corresponds to the investors who acquire the titles, that is, they lend the money to the issuer to obtain a certain return.
  • The financial intermediary: a financial entity that works as a bridge between the issuer and the lender, collecting money from the lenders and facilitating the profitability granted by the issuer. The intermediary performs this work by charging commissions.

Parts of a loan

The parts that we can find in a loan are the following:

  • Redemption Value– The value of the redemption to be returned by the issuer.
  • Issue value: the amount of the title at the time it is generated.
  • Cash value: the value that the title has at a certain moment.
  • Par Value– The value of the security at the time interest is to be paid.

 

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