FIN101 Assignment 1

Question 1 – (5 marks) a) Equity markets facilitate the issue of financial securities that represent an ownership interest in an asset. An example of this is the stock market – an ordinary share is an example of equity where the shareholder receives profit from the business by that of a dividend or capital gains. The main characteristic of the equity market is that the equity finance provider gets an ownership interest in a particular asset. Equity is equipped by businesses to fund infrastructure, improve the businesses liquidity and to also ensure that funds are available to cover losses.

b) Corporate debt markets are a long-term debt market and it is a vital source of funding for the growth of corporations. This market is based around the idea that there is a financial commitment that requires periodic interest payments to be made over the span of the debt period and then the repayment of the principal. The principal can be paid at the completion of the loan term or in part payments that makes the debt amortised. Examples of these loans include: commercial property finance, term loans and bonds.

c) Governments must have very strict control over their cash flows and expenditures and when there is a deficit of funds governments will need to borrow from the Government debt market. If the government’s budget is in surplus, excess funds are used to repay debts that the government has accumulated. When a government is debt they will fund the repayments of these debts through long-term borrowing in both domestic and international markets. If a government has issues in short term liquidity funding, they can manage this by issuing short term securities which can help when there are issues in cash in flows and out flows when trying to meet commitments such as welfare payments to pensioners. If long-term borrowings are required,