Business finance

Question 1

Financial intermediation roles

Answer 1

The middle man between investors and borrowers

• Risk diversification (one lender not lending all money to one borrower)
• Aggregation (pooling lots of deposits together for better returns)
• Maturity transformation (loans and deposits mature at different times)
• Making a market (putting lenders and borrows ‘in touch’)
• Advice

Question 2

Relationship between bank and customer

Answer 2

fiduciary relationship - banks expected to act in good faith to the customer
Mortgagor/ mortgagee - bank has right to assets of customer if they default on the loan
Principle/ agent - bank acts as agent for customer
Bailor/ bailee - bank looks after businesses property
Receivable/ payable - contactually owe each other

Question 3

Primary vs secondary vs bank of england

Answer 3

Primary - bank that deal with day to day transactions
Secondary - Offer tailored advice to large commercial clients
Bank of england - acts as a banker to the banks

Question 4

Roles of Bank of england

Answer 4

• Carry out monetary policy

- Ensure financial stability

Question 5

Cash transmission mechanisms

Answer 5

• General clearing
• Electronic fund transfers (EFT)
• Bank automated clearing system (BACS)
• Clearing house automated payment system (CHAPS)
• Society for worldwide interbank financial telecommunications (SWIFT)
• Faster payment scheme
• Payment gateways
• Digital commerce platforms

Question 6

Money markets

Answer 6

Short term, highly liquid investments e.g:

• Treasury bills (issued by BoE, minimum £500,000)
• Deposits
• Certificates of deposits (CDs) (issued for deposits £50,000+)
• Gilts
• Bonds
• Commercial papers

Question 7

Capital markets

Answer 7

Long term finance

• Primary market (new shares issued)
• Secondary markets (shares that are already in use)
• The banking system
• Bond markets
• Leasing
• Debt factoring
• International markets

Question 8

Treasury trade off

Answer 8

Liquidity - having enough cash to pay the bills

Profitability - not having too much cash as its an idle asset

Question 9

Influences on the level of cash balances

Answer 9

Transaction motive - to meet current day to day payment needs
Precautionary motive - to cushion against unplanned expenditure
Investment motive - having funds for investments e.g shares
Finance motive - to cover major transactions

Question 10

Balancing short and long term finance

Answer 10

Aggressive - use more short term finance
Defensive - long term finance
Average - balance between long and short term finance

Question 11

Sources of equity finance

Answer 11

Retained earnings - internally generated
Rights issues of shares - offering new shares to current shareholders in return for cash
New issue of shares - usually done when listed on stock market for the first time

Question 12

New issues of shares (a source of equity finance)

Answer 12

Placings - company - inv. bank - chosen clients
Public offers
- offer for sale - company - inv. bank - public
- direct offer - company - public

Question 13

Pricing of new issues of shares

Answer 13

Underwriting - institution agreeing to buy any unsold shares

Offer for sale by tender - public is invited to offer for shares at the price they are willing to pay

Question 14

Preference shares

Answer 14

• no voting rights

- fixed rate dividend

Question 15

Sources of debt finance

Answer 15

Overdraft
Debt factoring - when a business receives loan finance so if customers don’t repay, business doesn’t have to repay
Term loans - a bank loan where repayment date is set at the time of borrowing
Loan stock - debt capital (bonds and debentures)
Leasing - finance lease - long term rental of asset
- operating lease - short term rental of asset

Question 16

Financing a growing business

Answer 16

Business angels - wealthy individuals investing in start ups early stages
Crowdfunding - raising a specific sum of money usually by the internet
Venture capitalists - invest but expect high returns

Question 17

Risks of financing exports

Answer 17

Trading risk;

• physical risk - goods being lost or stolen
• trade risk - customer refusing to accept goods on delivery
• credit risk - default by the customer
• liquidity risk - inability to finance credit given to customers

Question 18

Ways of reducing credit risk

Answer 18

• Bills of exchange - a bill signed by overseas buyers bank to say payment is guaranteed
• Letters of credit - bank pays immediate payment, buyer then pays the bank back
• Export credit insurance - insurance against the risk of non-payment by foreign customers

Question 19

Green finance

Answer 19

A source of finance specifically used to finance activities leading to environmental benefits
- Green bonds - government issues debt but debt must be spent on eco friendly projects

Question 20

Green bond principles

Answer 20

• Proceeds must only be used for projects with clear eco benefits
• Must be a defined process for project evaluation and selection
• Proceeds must be kept in a seperate account
• Use of proceeds should be reported