Cost of new debt includes
The cost of new debt includes:
- Interest Rate: The percentage rate at which the borrower pays interest on the loan. This can be a fixed rate or a floating rate.
- Fees: Origination fees, closing costs, and other charges associated with obtaining the loan.
- Amortization: The process of paying off the loan through regular installments, which includes both interest and principal.
- Default Risk: The risk that the borrower may default on the loan, which can result in losses for the lender.
- Credit Risk: The risk that the borrower may not be able to repay the loan due to credit issues.
- Liquidity Risk: The risk that the borrower may not be able to access the funds when needed.
- Repayment Risk: The risk that the borrower may not be able to make timely payments.
- Collateral Risk: The risk that the collateral used to secure the loan may not be sufficient to cover the loan amount.
- Tax Implications: The tax implications of taking on new debt, such as the interest expense being tax-deductible.
- Opportunity Cost: The opportunity cost of taking on new debt, which is the potential return that could have been earned if the funds were invested elsewhere.
- Debt Service Coverage Ratio: The ratio of the borrower's debt service payments to their net operating income, which measures the borrower's ability to service the debt.
- Debt-to-Equity Ratio: The ratio of the borrower's debt to their equity, which measures the borrower's leverage.
- Covenants: Any restrictions or covenants included in the loan agreement that may limit the borrower's ability to take on additional debt or make certain business decisions.
- Call Protection: The right of the borrower to prepay the loan without penalty, which can be beneficial if interest rates fall.
- Prepayment Penalty: The fee charged to the borrower if they prepay the loan before the maturity date.
These costs can vary depending on the type of debt, the borrower's creditworthiness, and the market conditions at the time of borrowing.