Money

Question 1

characteristics of money

Answer 1

acceptable
divisible
portable
durable
valuable
scarce
hard to counterfeit

Question 2

functions of money

Answer 2

Medium of exchange
Unit of account
Method of deferred payment
Store of value

Question 3

narrow money

Answer 3

money in forms that can be used as mediums of exchange generally notes and coins

Question 4

broad money

Answer 4

money in any form including bank or other deposits as well as cash

Question 5

money market

Answer 5

market for short term loan finance , where money is lent for upto 12 months

Question 6

capital market

Answer 6

market for medium to longer term loan finance . where securities such as shares and bonds are issued to raise medium to long term financing

Question 7

foreign exchange market

Answer 7

a market where currencies are traded

Question 8

financial market

Answer 8

any exchange that facilitates the trading of financial instruments such as stocks, bonds, foreign exchange or primary commodities

Question 9

debt finance

Answer 9

borrowing money from an outside source with the promise of paying back the borrowed amount, plus the agreed upon interest, at a later date eg. mortgage, bank loans, bank overdraft, corporate bonds, credit card, peer to peer lending

Question 10

equity finance

Answer 10

raising capital by selling shares of a business to investors eg. angel investors, venture capitalists, stock market listing

Question 11

advantages of debt finance

Answer 11

-less capital required to be invested
-relatively cheap source of finance compared to dividends
-easy to pay interest if profits and cash flows are strong

Question 12

disadvantages of debt finance

Answer 12

-businesses may be vulnerable to unexpected changes in interest rates
-businesses have less control of events if they’re highly geared ie. have a high ratio of debt to equity

Question 13

advantages of equity finance

Answer 13

-equity is risk capital and does not offer a fixed return> businesses have some control over when/if to pay a dividend to investors
-gives a business more flexibility eg raising fresh equity capital at different stages of the business development

Question 14

disadvantages of equity finance

Answer 14

-dilution of ownership for the original founders
-equity requires a higher return than debt because it is risk capital (investors can lose their money)
-growing expectations over time that dividends will be paid

Question 15

venture capitalists

Answer 15

business professionals who invest money into startups of behalf of a risk capita company (they use other peoples money)

Question 16

angel investors

Answer 16

well-off individuals who invest their own money in a startup venture