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why debt is sometimes used to finance the future and how, as a financial director, you would set up debt policies for a municipality.
Expert Answer
Debt financing occurs when a firm cannot support its need to make capital investments to cater to the surge in demand or in other words needs to raise money for working capital or capital expenditures. The firm can do so by selling bonds, bills or notes to individuals and/or institutional investors. The individuals or institutions become creditors in that case. Often debt financing is used to evade taxes, avoid dividend payout to some extent, increase ROA.
Debt policy for municipality:
- Debt Limits: The Policy should consider setting specific limits or acceptable ranges for each type of debt. The limits should be in terms of legal and financial.
- Debt Structuring practices: It should include specific guidelines regarding the debt structuring practices for each type of bond
- Debt Issuance Practices. The Policy should provide guidance regarding the issuance process, which may differ for each type of debt. This includes selection and use of professional service providers, criteria for determining the sale method, issuance of advance refund etc.
- Debt Management Practices. The Policy should provide guidance for ongoing administrative activities including primary and secondary market disclosure practices.
- The Debt Policy should clearly state whether or not the entity can or should use derivatives.
More Answers
Debt financing occurs when a firm cannot support its need to make capital investments to cater to the surge in demand or in other words needs to raise money for working capital or capital expenditures. The firm can do so by selling bonds, bills or notes to individuals and/or institutional investors. The individuals or institutions become creditors in that case. Often debt financing is used to evade taxes, avoid dividend payout to some extent, increase ROA.
Debt policy for municipality:
- Debt Limits: The Policy should consider setting specific limits or acceptable ranges for each type of debt. The limits should be in terms of legal and financial.
- Debt Structuring practices: It should include specific guidelines regarding the debt structuring practices for each type of bond
- Debt Issuance Practices. The Policy should provide guidance regarding the issuance process, which may differ for each type of debt. This includes selection and use of professional service providers, criteria for determining the sale method, issuance of advance refund etc.
- Debt Management Practices. The Policy should provide guidance for ongoing administrative activities including primary and secondary market disclosure practices.
- The Debt Policy should clearly state whether or not the entity can or should use derivatives.
