Financial Context Of Business

Question 1

Capital Markets

Answer 1

stock-markets for shares and bond markets.

Question 2

Money markets

Answer 2

provide short-term (< 1 year) debt financing and investment.

Question 3

Commodity markets

Answer 3

facilitate the trading of commodities (e.g. oil, metals and agricultural produce

Question 4

Derivatives markets

Answer 4

provide instruments for the management of financial risk, such as options and futures contracts

Question 5

Insurance Markets

Answer 5

facilitate the redistribution of various risks

Question 6

Foreign exchange markets

Answer 6

facilitate the trading of foreign exchange.

Question 7

Roles of a financial Intemediary

Answer 7

• Risk reduction
By lending to a wide variety of individuals and businesses, financial intermediaries reduce the risk of a single default resulting in total loss of assets.

• Aggregation
By pooling many small deposits, financial intermediaries are able to make much larger advances than would be possible for most individuals.

• Maturity transformation
Most borrowers wish to borrow in the long-term whilst most savers are unwilling to lock up their money for the long-term. Financial intermediaries, by developing a floating pool of deposits, are able to satisfy both the needs of lenders and borrowers.

• Financial intermediation
Financial intermediaries bring together lenders and borrowers through a process known as financial intermediation.

Question 8

Types of Short and medium-term instruments

Answer 8

• short-term certificates of deposit, which are deposits that will be repaid with interest at a predetermined point in time
• bills of exchange, which are typically of 3–6 months duration and are sold with a promise to repay at that date
• commercial papers, which are debt securities issued by the largest companies
• trade credit, which allows business to delay payment for raw materials, components, business services, etc.
• leasing and hire purchase.

Question 9

Types of Long term instruments

Answer 9

• equity finance
Equity finance is available to limited liability companies through the issue of shares. For publicly quoted companies, additional shares (‘rights issues’) can be issued via the Stock Market.

• debt finance

Question 10

Length of Capital Market maturity?

Answer 10

> 1 Year examples Equities, bonds and Mortgages

Question 11

Length of Money Market maturity?

Answer 11

< 1 year examples certificates of deposit and bills of exchange

Question 12

What is a Bill of Exchange

Answer 12

Issued by companies to finance trade and promises to pay a certain sum at a fixed future date to the other party.

Question 13

How is dividend yield calculated

Answer 13

Dividend per ordinary share / Market price of the share x 100

Question 14

Ways to calculate yield on bonds?

Answer 14

(a) The bill rate
Known as coupon rate so will be a flat percentage.

(b) The running rate or interest yield
annual interest/market value x 100%

(c) The gross redemption yield
The gross redemption yield gives the annualised overall return to the investor and incorporates both interest and capital gains and losses.

Question 15

What does a Central bank do for the government?

Answer 15

• Hold accounts
• Debt management
• Operates monetary policy
• Manages reserves of foreign currency