Business Finance

Question 1

What is the difference between equity and debt

Answer 1

Equity is supplied by owners who expect dividends in return (high risk, high reward)

Debt is supplied by lenders who expect interest in return (low risk, low reward

Question 2

What is risk diversification

Answer 2

One lender not lending all money to one borrower

Question 3

What is aggregation

Answer 3

Pooling lots of deposits together to get better returns

Question 4

What is maturity transformation

Answer 4

Loans and deposits maturing at different times

Question 5

What are the three types of bank

Answer 5

Retail banks
Commercial and investment banks
Bank of England

Question 6

What is a money market

Answer 6

Money markets involve investors buying and selling marketable securities

Question 7

What are marketable securities

Answer 7

Short term highly liquid investments

Question 8

What are some examples of marketable securities

Answer 8

Treasury bills (very secure, low returns)
Deposits (higher yields than treasury bills)
Certificates of deposit (fixed rate of interest)
Gilts (longer term government debt)
Bonds
Commercial papers

Question 9

What is the capital market

Answer 9

National and international market which businesses can obtain finance from (longer term)

Question 10

What are some examples of capital markets

Answer 10

National stock markets
Bond markets
Leasing 
Debt factoring
International markets

Question 11

What are the three main instruments used by capital markets to finance businesses

Answer 11

Equity
Preference shares
Loan stocks and debentures

Question 12

What is the minimum investment and maximum length on a treasury bill

Answer 12

£500000 and 12 months

Question 13

What is the minimum deposit required for a certificate of deposit (CD)

Answer 13

£50000

Question 14

What is the difference between primary and secondary markets

Answer 14

Primary markets are a source of new finance via new shares

Secondary markets are for securities of shares already in issue

Question 15

What are the three main ways of raising equity finance

Answer 15

Retained earnings
Rights issue of shares
New issue of shares

Question 16

What three ways to companies issue new shares

Answer 16

Placings (Company -> Issuing house -> Investing institutions)
Public offers (Company -> Issuing house -> Public)
Direct offer (Company -> Public)

Question 17

What two methods are used to price new shares

Answer 17

Underwriting

Offer for sale by tender

Question 18

Why might a company go public

Answer 18

Access to large source of finance
Improves marketability of shares
Raises the profile of company

Question 19

What are the drawbacks of a company going public

Answer 19

Expensive
Dilution of control
Greater scrutiny
Possibility of being taken over

Question 20

Why might a business use an overdraft

Answer 20

Flexible - Can be used and repaid as and when desired

Overall interest cost can be lower

Question 21

What are the disadvantages of an overdraft

Answer 21

Banks can demand immediate repayment

If permanently overdrawn, interest can increase cost

Question 22

What are some sources of debt finance

Answer 22

Overdraft
Debt factoring - purchasing trade debts
Term loans - fixed date borrowing
Loan stock - debt capital in form of securities
Leasing - transfer of assets

Question 23

What are some examples of agents to finance business

Answer 23

Business angels
Crowdfunding
Venture Capitalists (high risk, high reward)
Alternative Investment Market (AIM)