Financial Management Environment (6)

Question 1

How may a reverse yield gap occur? (lower yield)

Answer 1

Because shareholders may be willing to accept lower returns on their investment in short-term, in anticipation that they will make capital gains in the future

Question 2

What is reverse yield gap?

Answer 2

Dividend yield on shares is lwoer than interest yield on low-risk debt

Question 3

How may a reverse yield gap occur? (raise finance)

Answer 3

It can also arise if firms that are desperate to raise finance offer a yield on their debt in excess of the yield on shares

Question 4

What does the eurobond market involve?

Answer 4

Borrowing of funds from or depositing funds with a bank outside the country in which funds are denominated for a long-term

Question 5

What are eurobonds/

Answer 5

Long-term loans raised by international companies or other institutiuons and sold to investors in several countries at same time

Question 6

A borrower considering a eurobond issue?

Answer 6

Must consider the exchange risk of a long-term foreign currency loan

Question 7

If the money to be used to purchase assets that will earn revenue in a currency different to that of the bond issue?

Answer 7

Borrower will run the risk of losses from unfavourable exchange rate movements

Question 8

If the money to be used to purchase assets that will earn revenue in the same currency as the bond issue?

Answer 8

Borrower can match these revenues with payments on the bond, and so remove or reduce the exchange risk

Question 9

Benefits of blockchain technology?

Answer 9

Allows a secure, low-cost database of transactions that automatically update to record new transactions (e.g. BTC)

Question 10

What are multi-currency accounts?

Answer 10

Allow business cutomers to collect, store, convert and pay in a wide range of foreign currencies

Question 11

What are challenger banks?

Answer 11

Use their low cost base to offer competitive products and also offering more flexible banks (e.g Monzo)

Question 12

What can an app allow?

Answer 12

Currency hedging (e.g. using forward contracts to fix the exchange rate)

Question 13

How does fintech improve availability of long-term finance?

Answer 13

By creating new financial markets such as crowdfunding, P2P lending and security token offerings

Question 14

Examples of disintermiedation?

Answer 14

Crowdfunding, P2P lending and security token offerings

Question 15

What is crowdfunding?

Answer 15

Allows a company to access finance via an online crowdfunding platform, to pitch for finance from a large number of potential investors

Question 16

What is P2P lending?

Answer 16

Connects established businesses looking to borrow with investors who want to lend

Question 17

What can P2P lending result in/

Answer 17

Cheaper loan finance compared to a bank loan as lender is not having to support cost of maintaining infrastructure of intermediary

Question 18

Benefit of P2P lending?

Answer 18

Also quicker to arrange than a bank loan because process can be initiated and processed outside normal bank opening hours

Question 19

Drawback of P2P lending?

Answer 19

Not normally available to start-up companies as investors require an established trading history

Question 20

What happens in a security token offering/

Answer 20

Investor receives a token (e.g. a share in exchange for payment made in a cryptocurrency such as Bitcoin)

Question 21

What makes security token offerings more attractives to companies as a way of raising long-term equity finance?

Answer 21

Fewer regulations compared to share issues