METHODS OF FINANCING A SALE 243 shillings). This which has been sent direct to London is sold for $4788 (at 4.80), which if it had been received at the time of sale would have been worth at 6% interest $4671.22. The Argentino can often buy a ninety-day draft on London cheaper than he can purchase a sight bill on New York. To make it immaterial which way he pays, the dollar price should be cheaper. In the above case it could be about 1% less. CASE II If the exporter sells the bill he gets whatever happens to be the bank's purchasing rate for bills on Buenos Aires. This fluctuates according to the money market and the risk. If the dollar bill is discounted at 5% a year it yields $4748.96; if at 6%, the yield is $4728.75. If the sterling bill is sold on the basis of 5% (1% above the Bank of England rate) until the banker's ninety-day sight arrives, and at 32% during the duration of that bill, the result is as follows: The discount for 150 days on 1000 pounds at 5% is 205/6 pounds; the collection fee at 14% is 221⁄2 pounds, so the London bill is for 9971⁄2 pounds; the discount on this at 32% for ninety days is 8.7281 pounds; the total discount then is 32.0614 pounds; the net amount is 967.9386 pounds, which at 4.85 is worth $4694.50. CASE III The exporter may deliver the bill to his bank for collection and obtain an advance of 80% pending its settlement. On the dollar bill he gets $3880 (80% of $4850), upon which he pays 5% interest for 150 days amounting to $80.83. The cost of collection is 14%, $12.13. At the end of 150 days the exporter receives the balance, $970, less the interest and charges which leaves $877.04. This amount at the time of sale at 6% would have been worth $855.65, making a total value at that date for the draft of $4735.65. Since a sterling bill is paid for with a banker's ninety the conversion rate then will be 4.80. The exporter gets 80% of $4800 which is $3840. Five months later he receives the balance, $960, less $80 (interest on $3840 at 5%), and $12 (21⁄2 pounds for collection converted at 4.80), which equals $868. Five months earlier at 6% this would have been worth $846.83, making a total value at that time of $4686.83. CASE IV Another way in which foreign business is frequently financed is for the seller to send forward his trade bills for collection, and arrange for his bank to accept his own draft upon it, these being easily sold in the open market, and to great advantage when the rate is low. It will be five months before the proceeds of the dollar bill are received, but on the day that the bill and the documents are left for collection the seller draws on the bank at ninety days for $4850. This having been accepted by the bank is sold at 32% discount for $4807.56, but as 14% commission for acceptance has been paid, the net amount is $4795.43 (the proceeds less $12.13). At the end of ninety days the exporter must pay this acceptance (the day before it is due), but he gets the money by drawing on the bank at sixty days for $4850, which discounted at 32% yields $4821.71. He again pays an acceptance fee of $12.13. When this acceptance is due funds to the amount of $4837.87 (the collection charge has been deducted) have arrived. What was this form of settlement worth at 6% on the day of sale? At the end of ninety days the exporter paid out $12.13 plus $28.29 (the difference between the face of the first acceptance and the proceeds of the sec 245 METHODS OF FINANCING A SALE ond). At the end of 150 days he paid out $12.13. The present worth of these three amounts on the day of sale was $51.65 ($39.82 plus $11.83), which subtracted from $4795.43 gives $4743.78. The sterling bill is drawn against in a similar way. It has been seen that on an order of $4850 there has been obtained as low as about $4720 from a dollar bill and $4671 from a sterling bill. It is common for exporters to allow 2 to 22% for collection charges on South American accounts and to add another 1% if payment is to be made in ninety-day rather than sight exchange. Suppose the New York export price is $4700. If as in Case I the commission is $12.13 and interest at 6% for five months, $117.50, is to be added, these items are added to the invoice, and a bill drawn for $4829.63. If the buyer wants to pay in ninety-day sterling it is necessary for the seller, unless he wants to take the risk of exchange, to get a quotation on ninety-day bills five months hence. If it is 4.80, he divides $4829.63 by 4.80 and draws the bill for £1006-3-6. If the buyer does not care to see how the charges are made up, and the bank's buying rate for dollar bills of that class and duration is 22% off, the exporter divides $4700 by 975 and draws the bill for $4820.51, which will yield exactly $4700. Likewise if the bank's purchasing rate for such a sterling bill is 4.70 the exporter divides $4700 by 4.70 and draws the bill for £1000, which when sold at 4.70 a pound yields exactly $4700, The bank's buying rate includes interest and all charges,2 2 For some of the material in this chapter I am indebted to Paul T. Cherington, formerly Professor of Marketing in Harvard University, now of the J. Walter Thompson Co., New York. For a thorough discussion of exchange see A. C. Whitaker, Foreign Exchange. (D. Appleton and Co., New York, 1919.) CHAPTER XVI TRUST AND AGENCY SERVICES ✓174. Banks that do agency and fiduciary work. - A trust company usually does a banking business, lending money and credit for long and short times, and combining the services of saving and commercial banking. It keeps deposits for savings and checking accounts, and does a safe-deposit business. The peculiar work of a trust company lies in another field; it does a variety of trustee and agency work. The Federal reserve act empowers the Federal Reserve Board, under such rules and regulations as it may prescribe, to grant by permit certain trust powers to national banks applying therefor, if they have not less than the amount of capital and surplus required by the state for trust companies in that state. The Board may authorize the right to act as trustee, executor, administrator, registrar of stocks and bonds, guardian of estates, assignee, receiver, committee of estates of lunatics, or in any other fiduciary capacity in which the state banking corporations which compete with them are permitted to act. Accordingly many national banks may do a part or almost all of the work that a trust company in that particuar state may do. National banks in places which do not exceed 5000 inhabitants may act as agent for any insurance company, or as broker in the placing and procuring of loans; provided no liability for the payment of the principal or interest on a loan, or the premium on an insurance policy is incurred, and no guarantee of the truth of any statement in an application for insurance is made. POWERS OF TRUST COMPANIES 247 A trust company will assume and carefully perform for an individual or corporation almost any business task that is desired. Sometime ago The Guaranty Trust Company of New York published a chart which enumerated the following powers which the banking laws of the State of New York authorize trust companies to exercise: A Trust Company may BANKING Receive deposits of money. Lend money on real or personal securities. Accept for payment at a future date drafts drawn upon it by its customers. Buy and sell exchange, coin, and bullion. Discount and negotiate drafts, promissory notes, bills of exchange, and other evidences of indebtedness. Issue letters of credit authorizing the holders thereof to draw drafts upon it or its correspondents at sight, or upon time not exceeding one year. Give its bonds or obligations when moneys, or securities for money, are borrowed or received on deposit, or for investment. A Trust Company may INVESTMENT Purchase, invest in, sell stocks, bonds, and mortgages, and other securities. AGENCY A Trust Company may act as (a) Fiscal agent, transfer agent, registrar of the United States, any state, municipality, body politic or corporation, and in such capacities may receive and disburse money, transfer, register and countersign certificates of stock, bonds, and other evidences of indebtedness. (b) Attorney in fact for any lawful purpose, for any purpose or corporation (foreign or domestic). |