Business Finance Flashcards
What is the difference between equity and debt
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
What is risk diversification
One lender not lending all money to one borrower
What is aggregation
Pooling lots of deposits together to get better returns
What is maturity transformation
Loans and deposits maturing at different times
What are the three types of bank
Retail banks
Commercial and investment banks
Bank of England
What is a money market
Money markets involve investors buying and selling marketable securities
What are marketable securities
Short term highly liquid investments
What are some examples of marketable securities
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
What is the capital market
National and international market which businesses can obtain finance from (longer term)
What are some examples of capital markets
National stock markets Bond markets Leasing Debt factoring International markets
What are the three main instruments used by capital markets to finance businesses
Equity
Preference shares
Loan stocks and debentures
What is the minimum investment and maximum length on a treasury bill
£500000 and 12 months
What is the minimum deposit required for a certificate of deposit (CD)
£50000
What is the difference between primary and secondary markets
Primary markets are a source of new finance via new shares
Secondary markets are for securities of shares already in issue
What are the three main ways of raising equity finance
Retained earnings
Rights issue of shares
New issue of shares
What three ways to companies issue new shares
Placings (Company -> Issuing house -> Investing institutions) Public offers (Company -> Issuing house -> Public) Direct offer (Company -> Public)
What two methods are used to price new shares
Underwriting
Offer for sale by tender
Why might a company go public
Access to large source of finance
Improves marketability of shares
Raises the profile of company
What are the drawbacks of a company going public
Expensive
Dilution of control
Greater scrutiny
Possibility of being taken over
Why might a business use an overdraft
Flexible - Can be used and repaid as and when desired
Overall interest cost can be lower
What are the disadvantages of an overdraft
Banks can demand immediate repayment
If permanently overdrawn, interest can increase cost
What are some sources of debt finance
Overdraft Debt factoring - purchasing trade debts Term loans - fixed date borrowing Loan stock - debt capital in form of securities Leasing - transfer of assets
What are some examples of agents to finance business
Business angels
Crowdfunding
Venture Capitalists (high risk, high reward)
Alternative Investment Market (AIM)
