Question

Please explain the following terms:

Pure discount loans

Interest-only loans

Amortized loans

What is a firm worth?

Answer 1

1.Pure discount loans

A pure discount loan is a loan that makes no payment until the maturity of the loan. Such loans are issued at a discount and redeemed at face value.

2.Interest only loans

Interest only loan is a loan in which the borrower pays only the interest for all or a few years of the loan. The principal is paid in a lump sum only at the maturity of the loan.

3.Amortized loans

Amortized loans refer to a loan in which a periodic payment of interest and principal is made over the term of the loan.

4.Firm worth

Firm worth is referred to as enterprise value.

Enterprise value is the total value of a company. It is calculated using the below formula:

Enterprise value= Market capitalization + Total debt – Cash and cash equivalents