Finance Questions and Answers Essay

6281 Words May 13th, 2012 26 Pages

2. (a) Discuss the role of money in a financial system.
• money is a financial asset that facilitates financial and economic transactions
• a medium of exchange—swapped for goods and services
• a store of value—wealth is held or measured in money terms
• a standard of deferred payment—used to record indebtedness
• a unit of account—transactions are priced in money terms
• currency is generally divisible, portable and durable

(b) Does money have to be currency? If not, what are some alternatives?
• money is anything that is universally acceptable as a medium of exchange
• further, money generally has the characteristics of being divisible and a store of value
• examples: currency,
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Equity may be applied to the purchase of business premises.

10. The money markets provide the opportunity for institutional investors and large corporations to manage their short-term cash flows. Discuss this statement using an example of a surplus entity and a deficit entity.
• wholesale markets in short-term funds
• institutional investors include commercial banks, finance companies, investment banks, funds managers, insurance offices, superannuation funds, large corporations
• facilitates the management of liquidity by enabling investors and borrowers with short-term surplus funds and short-term funds shortages, respectively, to manage their financing needs
• a surplus entity is a supplier or source of funds such as a superannuation fund
• a deficit entity is a borrower or user of funds might be a company who needs financing for a project

11. Financial instruments may be categorised as equity, debt or derivatives. Discuss each category. In your answer, be sure to explain the differences between debt, equity and derivatives.
• debt is a loan that must be repaid under the terms and conditions of the loan contract—interest payments, principal repaid
• the loan contract will specify the timing and amount of cash flows—type and rate of interest, frequency of payments, maturity of loan
• equity represents an ownership

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