FIN.10:4.2 - Translate the instrument into changing claims and cash

Recover the actual borrower or issuer, financier, claim, security, ranking, guarantees, covenants and relevant options. FDM.3 derives events from terms and tracks the changing principal or other state; use that supplier rather than infer behavior from an instrument’s label. FDM.1–2 resolves which entity owes the money and whether another entity’s support is available. The financial comparison consumes those qualified events and adds cost, risk and fit to the need.

For debt, separate committed limit, amount drawn, outstanding principal and each payment due. A revolving facility permits repayment and redrawing only under its actual rules. A term loan may amortize principal, repay a bullet at maturity, or capitalize interest. Capitalized interest avoids an immediate payment but increases a later claim. Unused-line fees, upfront charges, minimum interest and mandatory repayments can make the cost depend on utilization and duration.

Construct each interest amount from its actual rate convention, reference rate, spread, reset dates, day count and outstanding balance. Include caps, floors or delayed resets if they change the comparison. A quoted annual nominal rate with monthly compounding differs from an effective annual rate. An amortizing loan’s later interest applies to remaining principal; treating the initial face amount as outstanding throughout overstates that interest. Conversely, applying the smaller closing balance to the whole period understates it.

Collateral and guarantees affect more than the quoted spread. A pledge may prevent another valuable use of the asset or reduce future borrowing capacity. A guarantee can move loss to another entity and may require payment or consent. Count its actual charge, exposure and effect on access; the collateral’s full market value is not automatically an immediate cash cost. FIN.12 establishes the resulting restrictions, and FIN.11 considers the whole financing position.

For equity, recover the interests issued, economic participation, voting or control rights, preference, conversion, redemption and any further funding obligations. A small stated percentage can carry rights that change its financial consequence. An investor’s required return is an opportunity cost and valuation input, not a promised coupon unless the actual instrument creates such a payment. Common equity with no mandatory redemption has different service risk from debt; a preference or redeemable instrument needs its own terms.