Assignment 3

Ali Ammar
Section B
What Is a Funded Exposure?
Funded exposure is a company's debt that matures in more than one year or one business
cycle. This type of debt is classified as such because it is funded by interest payments made by
the borrowing firm over the term of the loan.
Funded debt is also called long-term debt since the term exceeds 12 months. It is different
from equity financing, where companies sell stock to investors to raise capital.
What Is an Unfunded Exposure?
Unfunded exposure is a short-term financial obligation that comes due in a year or less.
Many companies that use short-term or unfunded debt are those that may be strapped for cash
when there isn't enough revenue to cover routine expenses.
Examples of short-term liabilities include corporate bonds that mature in one year and
short-term bank loans. A firm may use short-term financing to fund its long-term operations.
This exposes the firm to a higher degree of interest rate and refinancing risk, but allows for more
flexibility in its financing.
Types
1. Letter of Credit
A letter of credit or "credit letter" is a letter from a bank guaranteeing that a buyer's
payment to a seller will be received on time and for the correct amount. In the event that
the buyer is unable to make a payment on the purchase, the bank will be required to cover
the full or remaining amount of the purchase. It may be offered as a facility.
2. Bank Guarantees
A bank guarantee is a type of financial backstop offered by a lending institution. The
bank guarantee means that the lender will ensure that the liabilities of a debtor will be
met. In other words, if the debtor fails to settle a debt, the bank will cover it. A bank
guarantee enables the customer, or debtor, to acquire goods, buy equipment or draw
down a loan.
3. Banker Acceptances
 The banker's acceptance is a negotiable piece of paper that functions like a post-dated
check, although the bank rather than an account holder guarantees the payment. Banker's
acceptances are used by companies as a relatively safe form of payment for large
transactions.