The Financial System Flashcards
Factors Affecting Sources Used to Borrow
Nature of the business (sole trade, gov, etc)
Amount of money required
Time period the money is needed over
Receipts and Payments
Businesses receipts (money in) and payments (money out) are usually not in synch. Depends on Receipts: payment terms offered, how good customers are at paying, seasonality and efficiency of invoicing Payments: short of long term e.g day to day costs, capital or investment payments
Funding Requirements
Could be:
Short term - such as an overdraft
Medium term - HP or leasing
Long term - bank loans or share capital
Money Needs of a Business
Working capital - day to day money needs
Investment capital - money used to invest in things like machinery or M&A
Asset management function - creating a portfolio of long term assets
Financial Markets
Covers: Short term funds Capital Commodities Derivatives Insurance FX
Financial Institutions
Includes:
Banks
Companies offering loans, pensions, insurance or help with buying or selling shares orbonds
Financial Products
Includes: Shares Bonds Certificates of deposits Mortgages Bills of exchange
Financial Market Types
Money markets - short term borrowing, between overnight and 1 year. Used for liquidity needs
Capital markets - longer term instruments like shares, bonds and other investments are traded. Split into primary and secondary
Primary - where new instruments are sold
Secondary - where shares and bonds are subsequently traded (stock markets)
FX - buying and selling currency
Commodity - for trading commodities
Insurance - sell policies protecting buyer against risk
Derivative
An arrangement or product with a value derived from or dependent on the value of an underlying asset, e.g. commodity, currency or security
Role of Financial Intermediary
Providing a marketplace Providing for different time scales Spreading the risk Convenience of amounts Economy of scale
Factors to Consider as a Borrower or Lender
Yield (cost) Risk How much? Time period Cost Liquidity
Financial Instruments Available in Money Markets
Overdrafts Short term bank loans Credit agreements Leasing Hire purchase Trade credit Commercial paper Bills of exchange Certificates of deposit
Financial Instruments in Capital Markets
Ordinary shares (equity)
Bonds
Mortgages
Mezzanine financing
Types of Bonds
Debentures = sold on money markets with fixed interest by co’s instead of taking a bank loan
Loan stock = similar to debentures but shares are used as collateral
Treasury bills = issued by a gov at a discount from the face value
New/Small Business Disadvantages in Money and Capital Markets
Lack of business history
Lack of access to stock/bond markets
