Definition of Debt (Credit Insurance)

Debt (Credit Insurance)

Money, goods or services that someone is obligated to pay someone else in accordance with an expressed or implied agreement. debt may or may not be secured.

Best-interests-of-creditors test

The requirement that a claim holder voting against a plan of reorganization
must receive at least as much as he would have if the debtor were liquidated.

Coinsurance effect

Refers to the fact that the merger of two firms decreases the probability of default on
either firm's debt.

Comparative credit analysis

A method of analysis in which a firm is compared to others that have a desired
target debt rating in order to infer an appropriate financial ratio target.

Consumer credit

credit granted by a firm to consumers for the purchase of goods or services. Also called
retail credit.

Credit

Money loaned.

Credit analysis

The process of analyzing information on companies and bond issues in order to estimate the
ability of the issuer to live up to its future contractual obligations. Related: default risk

Credit enhancement

Purchase of the financial guarantee of a large insurance company to raise funds.

Credit period

The length of time for which the customer is granted credit.

Credit risk

The risk that an issuer of debt securities or a borrower may default on his obligations, or that the
payment may not be made on a negotiable instrument. Related: Default risk

Credit scoring

A statistical technique wherein several financial characteristics are combined to form a single
score to represent a customer's creditworthiness.

Credit spread

Related:Quality spread

Crediting rate

The interest rate offered on an investment type insurance policy.

Creditor

Lender of money.

Debt/equity ratio

Indicator of financial leverage. Compares assets provided by creditors to assets provided
by shareholders. Determined by dividing long-term debt by common stockholder equity.

Debt

Money borrowed.

Debt capacity

Ability to borrow. The amount a firm can borrow up to the point where the firm value no
longer increases.

Debt displacement

The amount of borrowing that leasing displaces. Firms that do a lot of leasing will be
forced to cut back on borrowing.

Debt instrument

An asset requiring fixed dollar payments, such as a government or corporate bond.

Debt leverage

The amplification of the return earned on equity when an investment or firm is financed
partially with borrowed money.

Debt limitation

A bond covenant that restricts in some way the firm's ability to incur additional indebtedness.

Debt market

The market for trading debt instruments.

Debt ratio

Total debt divided by total assets.

Debt relief

Reducing the principal and/or interest payments on LDC loans.

Debt securities

IOUs created through loan-type transactions - commercial paper, bank CDs, bills, bonds, and
other instruments.

Debt service

Interest payment plus repayments of principal to creditors, that is, retirement of debt.

Debt service parity approach

An analysis wherein the alternatives under consideration will provide the firm
with the exact same schedule of after-tax debt payments (including both interest and principal).

Debt-service coverage ratio

Earnings before interest and income taxes plus one-third rental charges, divided
by interest expense plus one-third rental charges plus the quantity of principal repayments divided by one
minus the tax rate.

Debt swap

A set of transactions (also called a debt-equity swap) in which a firm buys a country's dollar bank
debt at a discount and swaps this debt with the central bank for local currency that it can use to acquire local
equity.

Debtor in possession

A firm that is continuing to operate under Chapter 11 bankruptcy process.

Debtor-in-possession financing

New debt obtained by a firm during the Chapter 11 bankruptcy process.

Demand line of credit

A bank line of credit that enables a customer to borrow on a daily or on-demand basis.

Eurocredits

Intermediate-term loans of Eurocurrencies made by banking syndicates to corporate and
government borrowers.

Evergreen credit

Revolving credit without maturity.

Federal credit agencies

Agencies of the federal government set up to supply credit to various classes of
institutions and individuals, e.g. S&Ls, small business firms, students, farmers, and exporters.

Federal Deposit Insurance Corporation (FDIC)

A federal institution that insures bank deposits.

Firm's net value of debt

Total firm value minus total firm debt.

Five Cs of credit

Five characteristics that are used to form a judgement about a customer's creditworthiness:
character, capacity, capital, collateral, and conditions.

Foreign tax credit

Home country credit against domestic income tax for foreign taxes paid on foreign
derived earnings.

Full faith-and-credit obligations

The security pledges for larger municipal bond issuers, such as states and
large cities which have diverse funding sources.

Funded debt

debt maturing after more than one year.

Guaranteed insurance contract

A contract promising a stated nominal interest rate over some specific time
period, usually several years.

Insurance principle

The law of averages. The average outcome for many independent trials of an experiment
will approach the expected value of the experiment.

Interest rate on debt

The firm's cost of debt capital.

Investment tax credit

Proportion of new capital investment that can be used to reduce a company's tax bill
(abolished in 1986).

Junior debt (subordinate debt)

debt whose holders have a claim on the firm's assets only after senior
debtholder's claims have been satisfied. Subordinated debt.

Letter of credit (L/C)

A form of guarantee of payment issued by a bank used to guarantee the payment of
interest and repayment of principal on bond issues.

Line of credit

An informal arrangement between a bank and a customer establishing a maximum loan
balance that the bank will permit the borrower to maintain.

Long-term debt

An obligation having a maturity of more than one year from the date it was issued. Also
called funded debt.

Long-term debt/capitalization

Indicator of financial leverage. Shows long-term debt as a proportion of the
capital available. Determined by dividing long-term debt by the sum of long-term debt, preferred stock and
common stockholder equity.

Long-term debt ratio

The ratio of long-term debt to total capitalization.

Long-term debt to equity ratio

A capitalization ratio comparing long-term debt to shareholders' equity.

Line of credit

An informal arrangement between a bank and a customer establishing a maximum loan
balance that the bank will permit the borrower to maintain.

Original issue discount debt (OID debt)

debt that is initially offered at a price below par.

Portfolio insurance

A strategy using a leveraged portfolio in the underlying stock to create a synthetic put
option. The strategy's goal is to ensure that the value of the portfolio does not fall below a certain level.

Retail credit

credit granted by a firm to consumers for the purchase of goods or services.
See: consumer credit.

Revolving credit agreement

A legal commitment wherein a bank promises to lend a customer up to a
specified maximum amount during a specified period.

Revolving line of credit

A bank line of credit on which the customer pays a commitment fee and can take
down and repay funds according to his needs. Normally the line involves a firm commitment from the bank
for a period of several years.

Secured debt

debt that, in the event of default, has first claim on specified assets.

Senior debt

debt that, in the event of bankruptcy, must be repaid before subordinated debt receives any payment.

Structured debt

debt that has been customized for the buyer, often by incorporating unusual options.

Subordinated debt

debt over which senior debt takes priority. In the event of bankruptcy, subordinated
debtholders receive payment only after senior debt claims are paid in full.

Term life insurance

A contract that provides a death benefit but no cash build-up or investment component.
The premium remains constant only for a specified term of years, and the policy is usually renewable at the
end of each term.

Term insurance

Provides a death benefit only, no build-up of cash value.

Total debt to equity ratio

A capitalization ratio comparing current liabilities plus long-term debt to
shareholders' equity.

Trade credit

credit granted by a firm to another firm for the purchase of goods or services.

Trade debt

Accounts payable.

Unfunded debt

debt maturing within one year (short-term debt). See: funded debt.

Unsecured debt

debt that does not identify specific assets that can be taken over by the debtholder in case of default.

Variable life insurance policy

A whole life insurance policy that provides a death benefit dependent on the
insured's portfolio market value at the time of death. Typically the company invests premiums in common
stocks, and hence variable life policies are referred to as equity-linked policies.

Whole life insurance

A contract with both insurance and investment components: (1) It pays off a stated
amount upon the death of the insured, and (2) it accumulates a cash value that the policyholder can redeem or
borrow against.

RATIO OF DEBT TO STOCKHOLDERS’ EQUITY

A ratio that shows which group—creditors or stockholders—has the biggest stake in or the most control of a company:
(Total liabilities) / (Stockholders’ equity)

Credit

Buying or selling goods or services now with the intention of payment following at some time in
the future (as opposed to buying or selling goods or services for cash).

Creditors

Purchases of goods or services from suppliers on credit to whom the debt is not yet paid. Or a
term used in the Balance Sheet to denote current liabilities.

Debt

Borrowings from financiers.

Debtors

Sales to customers who have bought goods or services on credit but who have not yet paid their debt.

Bad debts

The amount of accounts receivable that is not expected to be collected.

Credit

One side of a journal entry, usually depicted as the right side.

bad debts

Refers to accounts receivable from credit sales to customers
that a business will not be able to collect (or not collect in full). In hindsight,
the business shouldn’t have extended credit to these particular
customers. Since these amounts owed to the business will not be collected,
they are written off. The accounts receivable asset account is
decreased by the estimated amount of uncollectible receivables, and the
bad debts expense account is increased this amount. These write-offs
can be done by the direct write-off method, which means that no
expense is recorded until specific accounts receivable are identified as
uncollectible. Or the allowance method can be used, which is based on
an estimated percent of bad debts from credit sales during the period.
Under this method, a contra asset account is created (called allowance
for bad debts) and the balance of this account is deducted from the
accounts receivable asset account.

debt-to-equity ratio

A widely used financial statement ratio to assess the
overall debt load of a business and its capital structure, it equals total liabilities
divided by total owners’ equity. Both numbers for this ratio are
taken from a business’s latest balance sheet. There is no standard, or
generally agreed on, maximum ratio, such as 1:1 or 2:1. Every industry
is different in this regard. Some businesses, such as financial institutions,
have very high debt-to-equity ratios. In contrast, many businesses
use very little debt relative to their owners’ equity.

Cost of Debt

The cost of debt (bonds, loans, etc.) that a company is charged for
borrowing funds. A component of the cost of capital.

Debt Ratio

The percentage of debt that is used in the total capitalization of a
company. It is calculated by dividing the total book value of the
debt by the book value of all assets.

Total Debt to Total Assets Ratio

See debt ratio

Allowance for bad debts

An offset to the accounts receivable balance, against which
bad debts are charged. The presence of this allowance allows one to avoid severe
changes in the period-to-period bad debt expense by expensing a steady amount to
the allowance account in every period, rather than writing off large bad debts to
expense on an infrequent basis.

Bad debt

An account receivable that cannot be collected.

Debt

Funds owed to another entity.

Long-term debt

A debt for which payments will be required for a period of more than
one year into the future.

credit analysis

Procedure to determine the likelihood a customer will pay its bills.

credit policy

Standards set to determine the amount and nature of credit to extend to customers.

funded debt

debt with more than 1 year remaining to maturity.

line of credit

Agreement by a bank that a company may borrow at any time up to an established limit.

MM's proposition I (debt irrelevance proposition)

The value of a firm is unaffected by its capital structure.

secured debt

debt that has first claim on specified collateral in the event of default.

subordinated debt

debt that may be repaid in bankruptcy only after senior debt is paid.

Credit Crunch

A decline in the ability or willingness of banks to lend.

Credit Rationing

Restriction of loans by lenders so that not all borrowers willing to pay the current interest rate are able to obtain loans.

Debt Instrument

Any financial asset corresponding to a debt, such as a bond or a treasury bill.

Investment Tax Credit

A reduction in taxes offered to firms to induce them to increase investment spending.

Monetizing the Debt

See printing money.

National Debt

The debt owed by the government as a result of earlier borrowing to finance budget deficits. That part of the debt not held by the central bank is the publically held national debt.

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