Capital Sources of Public Funding and Debt

Capital Sources of Public Funding and Debt

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Capital Sources of Public Funding and Debt

Public funding is any funding that is obtained from the public through shares issues, deferred ordinary shares and rights issue. The share issues are in the form of new shares issues or preference share issues. All these are involved in providing sufficient funds to manage financial tasks in governmental projects. Financing is very important for every project or services that the government offers. It becomes essential for the project coordinator or the person in charge of every project or service to ensure that enough funds are allocated for the financial tasks that government approves of. Debts is also a way of financing. Debt financing involves borrowing funds from a creditor with the aim of paying back the fund with an interest in future. This paper is going to discuss various types of debts.

General obligation and revenue bonds

General obligation bonds are bonds that are backed by the full faith and credit of the issuer without an identified project as the source of funds. This type of debt is usually payable using any means or sources necessary. The issuers in this bond are states, towns, and school districts. The issuer uses the taxation power within its authority to make sure that the bond is paid back. The bond is considered to be safe. Revenue bonds, on the other hand, usually are backed by the revenue generated from the specific project that is being funded. The issuers in this bond are hospitals, transportation, sewer, and power systems. The revenue generated is used to pay the debt together with the interest. This is an indication that the debt waits until the project is complete and once it is complete the revenue generated is used to pay the debt (Timothy, 2014). This type of debt is not safe but rather considered to be at a higher risk because it is not a guarantee that the project will work effectively to generate the revenue to pay back the debt. The general obligation and revenue bonds promise a regular interest payment to investors together with [a return of principal at maturity.

Certificates of obligation

A Certificate of Obligation is used by cities as financing mechanisms to pay to make payment of the contractual obligation in a construction contract, the purchase of material, supplies, equipment, machinery, buildings, land, and rights of way for authorized needs and purposes and lastly the payment of the professional services. The certificate of obligation gives the government an opportunity to provide the immediate response or take immediate action in case of an emergency in the state (Patrick Raines, 2008). It is also a form debt available to governing councils in the case of emergency. It needs immediate action without time for a referendum. This means that it does not need the voters’ approval. The certificate of obligation is there to ensure that the government is in a position to borrow money so as to set up provisional buildings and necessary equipment for police and emergency services. The certificate of obligation ensures that the community is served in continuity.

Contractual obligations

Contractual obligation is typically made up of long-term debt and the related interest payments, operating leases, purchase orders for merchandise inventory and other agreements to purchase goods and services that are legally binding and that require minimum quantities to be purchased. Contractual obligation involves parties where each party exchanges something that has a value such as services, money or product. The agreement entails some obligations which each party is connected to the agreement. Contractual obligation depends on the specific subject matter of the contract.

Commercial paper

Commercial paper as a type of debt is a short-term and unsecured promissory note issued by any corporations. Commercial paper is usually used as a source of working capital, receivables financing, and other short-term financing needs. Commercial paper has maturity dates that range from one to two hundred and seventy days. The commercial paper is excluded from the registration with Securities and Exchange Commission by the federal law due to its short maturity. Initially, only companies with high credit ratings and creditworthiness offered commercial paper. However, the commercial paper has been made viable financing alternatives for entities with lower credit ratings by some innovations such as liquidity programs.

Research shows that many government invest in commercial paper in various ways. First is to provide diversification and competitive rates of return. Secondly, the government uses commercial paper as a short term for funds that are not immediately required. Commercial paper is backed by the financial strength of the issuer and is considered to be the very safe investment because the financial situation of a company can easily be predicted after few months. The commercial paper usually pays a higher rate of interest than the guaranteed instruments, and the rates rise by the national economic growth.

Capital leases

A capital lease is also related to the financial lease. A capital lease has the economic characteristics of asset ownership. A capital lease is said to last for the life of the asset while the present value of lease payments covers for the price of the asset. The capital lease cannot is canceled, and the lease is renewable. In the end, the lessor does not have an obligation to pay insurance and taxes on the asset. The obligation is left to the lessee where the lessee consequently cuts down the lease payment leading to net leases. At this moment, it is evident that the risk is placed on the lessee. For a lease to be considered as a capital lease, it must have the following conditions.

The lease transfers ownership of the asset to the lessee by the end of the lease term.

The lessee is provided with the option to purchase the asset at a price which is expected to be sufficiently lower than fair value at the date the option becomes exercisable that, at the inception of the lease, it is reasonably certain that the option will be exercised.

The lease term is for the major part of the economic life of the asset, even if the title is not transferred at the inception of the lease, the current value of the minimum lease payments amounts to at least substantially every fair value of the leased asset.

The lease assets should be of a specialized nature

Notes payable

A note payable is defined as a written promissory note in the form of an agreement. In notes payable, the debtor borrows a certain amount of money from a lender, and he or she makes a promise to pay back with interest after a predetermined period . The interest is usually fixed over the life of the note or might vary by the interest rate charged by the lender. Notes payable is classified as a short-term liability if it is due in 12 months or as the long-term liability if it is due in more than 12 months. The agreement needs a collateral and a restrictive covenant. A good example of a restrictive covenant can be not paying dividends to investors while any part of the loan is still unpaid.

References

Charles Horngren, W. H. (2012). Accounting. Pearson Higher Education AU.

J. Patrick Raines, C. G. (2008). Debt, Innovations, and Deflation: The Theories of Veblen, Fisher, Schumpeter, and Minsky. Edward Elgar Publishing.

Johnston, S. (1999). Debts and Interest in the Construction Industry: A Guide to The Late Payment of Commercial Debts (Interest) Act 1998. Thomas Telford.

Timothy W. Koch, S. S. (2014). Bank Management. Cengage Learning.