Planning is one of the factors that determine the success of both individuals and business. Thus, a business must engage in financial planning, which refers to the step taken by a firm to attain its strategic goals and objective. Financial planning, therefore, is aimed at determining how a business is utilizing its financial resources to achieve both short and long-term goals, resulting in sustainable success. Therefore, business financial planning is essential because it directly influences the success of a firm. Specifically, it enables entrepreneurs to efficiently utilize the available financial resources to gain a competitive advantage in the market, as funds will be available to essential business activities like marketing and employee motivation. Besides, capital business funding is increasingly becoming popular, even though only a few people understand how capital market works (Ahmad, Muhammad & Masron, 2009). Entrepreneurs or investors need to understand various capital market terminologies to enhance their success.
The coupon rate and the current market interest rate are some of the most common terminologies that are confusing people who operate in the capital market, especially those who not have sufficient financial knowledge. Many business people now rely on capital funding, and they must understand the two terminologies to avoid confusion while engaging in efficient financial planning. The coupon rate is defined as the stated rate of interest on a bond. In other words, it is the rate of interest that a bond issuer pays to the purchaser, and it is mainly based on the bond's face value (Ahmad, Muhammad & Masron, 2009). Coupon rate does not change after the insurance date or period has been set, making it one of the fixed interest rates in the capital market. Thus, the main difference between the coupon rate and the current market interest rate of a bond is that the former is fixed while the latter varies based on the economic circumstances.
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Unlike the coupon rate that is determined by the bond insurers, the current market interest rate is largely influenced by market forces and economic factors like inflation and uncertainties in the market (Moya-Martínez, Ferrer-Lapena & Escribano-Sotos, 2015). Coupon rate is fixed while the current market interest rate varies. Nonetheless, even though the coupon rate is fixed, is always influenced by the current market interest rate. Bond issuers often rely on the current market interest rate to set their coupon rate. The coupon rate is likely to be high when the current interest rate is increasing. The coupon rate, therefore, is determined by the current market interest rate.
Besides, mutual fund and mutual fund family are other terms that confuse many people who do not have in-depth knowledge of financial matters, although they may appear popular. A mutual fund refers to investment security that allows investors to pool their financial resources together, specifically in a professionally managed investment (Bhojraj, Jun & Yehuda, 2012). It is a collection of stocks and bonds, including other securities. Mutual fund family, on the other hand, is a collection of mutual funds that are grouped in the mutual fund sponsor. A mutual fund family is always created by mutual fund companies to enable investors to consolidate their investment, leading to reduced financial risks (Kaur, 2018). Also, a mutual fund family lowers the cost of investments. Hence, the family is just a group of mutual funds that are managed or by a similar mutual fund sponsor. Mutual fund gives people who do not understand the financial market the opportunity to invest in stocks or bonds through the help of professional financial acumen. The mutual fund investments are based on a high level of transparency, making them attractive to many investors.
Also, many capital investors do not understand the differences between the preferred stock dividend and common stock dividends. Investors can purchase either preferred or common stock, which may earn preferred dividend or common dividends, respectively. Thus, preferred stock dividends are paid to shareholders who own preferred stock in a company (Walther, 2014). Preferred shareholders are paid their dividends before common shareholders, primarily in a case where a firm is not able to pay all dividends to investors. At the same time, preferred stock dividends are always higher than common stock dividends. As a result, preferred stock dividends give investors more income compared to common stock dividends. Unlike common stock dividend rate whose rate keeps changing, preferred dividends are paid at a fixed rate (Walther, 2014). Preferred dividends ensure that investors are entitled to a predictable income. Consequently, many investors prefer to preferred stocks compared to common stocks.
In conclusion, business financial planning is essential because it gives firms a competitive advantage in the market. Business people can set strategic goals and objectives while ensuring efficient use of available financial resources, leading to long-term success. However, it is also vital for investors or entrepreneurs to understand various terminologies and concepts that are used in the capital market. The terms may look familiar, but they have different meanings. Investors can make wise investment decisions when they have a clear understanding of the terms used in the capital market. Many uncertainties characterize the current business environment, and entrepreneurs need to actively engage in financial planning to reduce the risks while increasing the chances of success in a competitive market.
References
Ahmad, N., Muhammad, J., & Masron, T. A. (2009). Factors influencing yield spreads of the Malaysian bonds. Asian Academy of Management Journal , 14 (2), 95-114.
Bhojraj, S., Jun Cho, Y. & Yehuda, N. (2012). Mutual fund family size and mutual fund performance: The role of regulatory changes. Journal of Accounting Research , 50 (3), 647-684.
Kaur, I. (2018). Effect of mutual funds characteristics on their performance and trading strategy: A dynamic panel approach. Cogent Economics & Finance , 6 (1).
Moya-Martínez, P., Ferrer-Lapena, R., & Escribano-Sotos, F. (2015). Interest rate changes and stock returns in Spain: A wavelet analysis. BRQ Business Research Quarterly , 18 (2), 95- 110.
Walther, B. (2014). The peril and promise of preferred stock. Digital Journal of Corporation Law , 39 (1), 161-179.
