Due to the growing interest in the investment market, I have seen that Term Finance Certificates (TFCs) have been more and more popular. The main aspects of TFCs such as their benefits, types, regulation, management, security, and the use of TFCs will be discussed in this article. My ambition is to give you a comprehensive review of this financial tool.
What is a Term Finance Certificate?
A Term Finance Certificate is a company’s debt issue for the period that it desires to raise funds. It is like a bond but has a shorter lifespan. TFCs are the choice of many brave investors who want to invest in secure and liquid assets or bear the risk and enjoy the opportunity of earning better returns than the usual savings accounts or government securities.
Benefits of Term Finance Certificates
There are many advantages for both the investor and the issuer of TFCs:
- Fixed Income: TFCs offer a regular cash flow through paying interest at regular intervals.
- Higher Yields: The usually higher interest rates of the money you make from putting money in TFC can be a nice thing to have compared to the use of traditional regular savings accounts or government bonds.
- Diversification: TFCs are a good way to diversify the investment portfolio of the investor.
- Flexibility: Creating TFCs in the way that they want is possible for the issuers.
- Market Liquidity: The secondary market is a place where TFC trading takes place and cash being available to the investors is possible through this way.
Types of Term Finance Certificates
TFCs come in various forms and are thus traded in the market:
1. Secured TFCs
Companies back these securities with specific assets of the company and thus the buyers have more assurance hence reducing the perceived risk.
2. Unsecured TFCs
These creditworthiness is not secured by specific assets but by the financiers paying back the money from the companies’ good track record.
3. Convertible TFCs
Under certain conditions these are changeable to the stockholder’s equities that belong to the company which issues these.
4. Floating Rate TFCs
These TFCs interest rates are determined by the selected benchmark, e.g., LIBOR.
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Term Finance Certificate Management
Both companies and investors can significantly benefit from proper management of TFCs. The main items are as follows:
- Interest Rate Management: Issuers have to set interest rates at the right level, which would bring in investors, while at the same time they should also stay profitable.
- Maturity Planning: Company’s financial needs and cash flow projections are matched with the TFC maturities.
- Risk Assessment: Regular checking of the company’s capacity to pay interest and principal.
- Investor Relations: Being honest and open with the bond holders.
Term Finance Certificate Security
The aspect of safety is a very important one to TFCs:
- Asset Backing: The secured TFCs are covered by specific assets namely the safety net is secured for the investors.
- Credit Ratings: The real credit rating of the maker of TFCs is reported on the ground of separate credit agencies.
- Trustee Oversight: TFC holders’ assets should be protected by a trustee being appointed to monitor the events.
- Covenants: These are legal agreements that restrict the issuer’s actions aiming at protecting the interests of the players.
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Term Finance Certificate Regulations
Several types of laws and regulations are imposed on TFCs to protect the investors and to preserve the integrity of the markets:
- Disclosure Requirements: Issuers are obliged to give full information on their financial condition and the TFC including the terms of the TFC.
- Listing Rules: The guidelines for listing must be met by TFCs listed on stock exchanges.
- Investor Protection: Rules and laws are implemented to ensure fraud does not occur by safeguarding investors and their financial activities.
- Taxation: TFC income may be subject to particular taxation systems but this may differ from country to country.
Conclusion
Term Finance Certificates term caries unique mark to the one which besides being reliable it takes on a speculative angle. There are always cons and pros in every investment, but you must be very sure about your understanding of the TFCs. Distributing time for thinking these parameters over, the client can determine whether he should involve TFCs in his investment portfolio or not.
FAQs
Q1: Are Term Finance Certificates suitable for all investors?
A1: Surely while TFCs rugs might interest many, they can be a risky investment. Typically they can do best for an investor who is aware and has a medium to high degree of risk tolerance.
Q2: How do I purchase Term Finance Certificates?
A2: TFC lickety-splits can be bought by you via stock exchanges, brokers, or during the initial offer period of the issuing company.
Q3: What happens if a company defaults on its TFC payments?
A3: If default occurs the secured TFC holders may claim the company assets or in plain English they may be part of debt negotiations.
Sources:
Term Finance Certificate Definition | Law Insider. (n.d.). Law Insider.
