Finance Institutions Questions
Autor: Nedellec Simon • August 18, 2015 • Coursework • 466 Words (2 Pages) • 768 Views
WEEK 4 TUTORIAL
1.13 : Money markets are used for a short-term basis, usually for assets up to one year. Conversely, the capital markets are used for long-term assets (maturity greater than one year). Hence, Holden should use capital markets to finance a new vehicule assembly plant as it is going to be used for a few years of production.
1.18 : The major risks faced by financial institutions are :
- Credit rik, related to the possibility that the borrower of loans or invests could not be able to give the amount back. To minimize the risk, insitutions should evaluate the borrower’s ability to repay the loan.
- Interest rate risk which can be a serious issue as it can quickly change the cash flow forecast and the value of interest rate-sensitive assests and liabilities.
- Liquidity risk,, if inadequate can make a firm fail even though over the long ru nit is profitable ! The financial insitution needs to make sure that the cash inflow is enough to deal with the cash outflows.
- Foreign exchange risk, related to the value flunctuation of exchange rates.
- Political risk, related to the possible flucuation in value of an insitution after a political decision or event in Australia or overseas.
(p193) 13.1 : The primary goal of a commercial bank is to generate profit for its shareholders.
13.3 : It is money that someone received from another party with the agreement that it will be repaid. (usually with interests) Ex : mortgage, loans.. It is the first source of funds used by banks and the principal way in which they earn income
13.7 : The major uses of funds as a bank are lending and investments, as well as non profitable activites as it is compulsory by law.
13.10 : With off-balance-sheet financing, the liabilities do not have to be reported because no debt or equity is created ! The most famous example is operating lease : the company majes a small down payment upfront and then monthly lease payments and as soon as the lease is ter mis p, the company cn buy the asset for a minimal amount (1 symbolic dollar usually !)
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