Introductory Finance Issues - Assignment Example

Introductory finance Name Affiliation Date Question no.1 a. Equity market The equity market is also known as the stock market. The equity market is such a market where share are issued and traded. Buyers and seller can exchange their shares and can buy new shares of different companies through equity market. It is one the crucial market of the country which is used to mobilize the foreign and capital resources. Equity market plays a significant role in the economic development of the country. It gives a platform to companies to collect finance and attract investors for their future ventures or for their current business. The trend of equity market or stock market directly proportion to the economic development of the country. The company always has issued its shares on some pre-determined price. When buy the shares and exchange their money with the ownership if the company is called as equity. As equity is derived from the word equal a buyer gives money and buy ownership of the company in the form of shares. The equity market also represents the effectiveness of the capital market. If equity market is successfully working with high trends it means the capital market of the country is also making progress with equity market[Kim00]. b. Corporate debt market Corporate debt markets, which is also known as the corporate bond market. It plays an important role in the economic development and financial stability of the country. The corporate debt market provides the capital funding flow to the companies with the help of the capital companies expands, innovate and provide goods and services to the people of the society. It raises the capital of the company. The corporate debt market issues corporate bonds. The corporate bonds include all the bonds that are issued by national and local governments. Corporate bonds include bonds that are issued by the financial and non-financial institutions. Corporate debt markets are separated from both primary and secondary markets. From issuers or company’s perspective corporate bond is used to raise the capital for current activity of the business and on the other hand, from the investor’s perspective corporate bond is used to diversify the risk by purchasing bonds of different activities of the same company. Thus, corporate bonds are secured and unsecured as well. The basic function of the corporate debt market in the nation’s capital market is to minimize the risk of corporate debt to raise the findings of the company’s activities[Roh14]. c. Government debt market Government debt market is also known as government bond market. In the government debt market government bonds are issued by the national or local government in domestic currency to support government spending and expense. The government bonds are fully backed by the full faith of government so that people can buy these bonds and in return government makes promises to pay particular interest for each month and repay it with full face value when bond get matured. The aim of government to establish effective government debt market is to make economic progress. As, the government bond market provides a number of benefits to the country like it is prerequisite of sound economic development of the country. It can increase the financial stability of the country and can also improve various financial intermediations through great economic development[Goo84]. d. Foreign exchange market Foreign exchange market is also one of the important market of nation’s capital market. The foreign exchange market provides an institutional structure through which the currency of one country is exchanged in another country. In general words, foreign exchange market provides the facility of buying and selling of national and international currency. When the currency of another country demanded in the capital market of another country and transaction has made in foreign currency such a transaction is called as a foreign currency transaction in foreign exchange market. Moreover, foreign currency transaction is an agreement between the seller and the buyer in which buyer promised to make a particular amount for the specific period of time in the particular currency that is mentioned in the agreement. Foreign exchange market performs various functions in the nation’s capital market. Like it transfers the purchasing power of one country to another one and it is one of the basic requirements in dealing with the multinational companies. It reduces the foreign exchange risk because the foreign exchange market provides hedge facility that transfer the risk. Furthermore, Foreign exchange market also offers credit for the international trade transaction that makes the foreign exchange transaction easy[Bar06]. e. Derivatives market Derivatives are the important financial instrument that is used to transfer the risk from one party to another. The value of the derivatives is derived from the value of something else that is the reason they are known as derivatives in the financial markets. The derivatives include bonds and loans. The values of derivatives are derived from rights or interest. The rights or interests can be interest rate, credit rate, currency rate, commodity index and many other. The market in which derivatives operate is known as derivative market. There are three types of derivative markets that supports capital market in many ways. The first derivative market is listed derivative market, which involves in the trading of highly standardized contracts. The second type of derivative market is over the counter derivative market that controls customized transactions of bilateral trade. The third category is known as cleared over the counter derivative market. It holds great importance in the nation’s capital market because it deals with counter party credit risk in bilateral trading of standardized transaction[McD06]. Question no.2 Corporate form of Organization There are many forms of business organization like sole proprietorship, partnership and others. The corporate is also an important form of business. In corporate form, the company is not directed by the one person even more than two persons operate a company at the same time. Different people operate accompany in corporate form. A corporation can raise the fund by issuing stock in this way a company can attract various investors to buy their stocks. The funds that obtained from the stock help in expanding and executing the business activities. The credibility of the corporate form of organizations is very high. Investors and creditors can easily grant investment to corporations because they consider a corporate form as more professional and organize form of business as compare to other form of business. The duties are well explained to every member of the corporation. All the members are equally responsible for fulfilling the liabilities and protecting the assets of the company. The shared responsibility makes the structure of the corporate business organization clearer and organized[Les08]. Basic funding alternatives Finance is a blood of every organization without funding and fiancé a company cannot operate a single function or a department. Thus, it is very important to arrange fiancé for the organization. Sometimes, all the members of the corporate form of business organization arrange fiancé and invest equally, but on the other hand, sometimes members fail to collect adequate finance for the company so they choose some alternative funding strategies. There are many alternatives, funding strategies like there are two most important alternatives are equity funding and debt funding. The equity funding is a funding strategy in which the company issues, share and investors buy the share in the exchange of the company’s ownership. On the other hand debt financing is obtaining the fund on high interest rate and conditions that must be repaid on a specific period of time. The other basic funding alternatives are micro-financing, company-to-company lending, merchant cash advance, private loans, loans from micro lenders, borrowing from the government, assets based lending, account receivable landings, acquisition loans, vendor credit, factoring, purchase order financing, mortgage of assets and many other[Mic13]. The funding source and its selection is basically depends on the company and its nature. In the corporate form of business organization where not one, but more than two people direct the single company, the members can choose equity funding strategy and can decide to issue the shares. On the other hand, the other organization who engages in manufacturing of goods can select debt financing to have fiancé on an immediate basis to complete their order and their delivery. Therefore, the funding and its selection are based on the form of business and directions of the members of the company. The equity and debt funding strategies will be discussed in the section below. Long-term equity Equity funding strategy is one of the investing strategy that is used most of companies of the world. Equity financing is the process of raising the funds of the company by selling the shares or the stocks of the company. It is also known as sale of ownership. The interested buyers buy the shares at a particular rate in exchange they get the ownership of the company. Moreover, some dividend is also paid to all the shareholders by the company at the year end. The shareholders also responsible for all the stakes of the company. If company bears any loss at any time, then all the stakeholders also bear the loss with the company. A log-term and short-term equity funding strategies are used by the organizations. The short-term and long-term equity funding reduces the risk of market exposure. The long and short term equity mostly associated with hedge funds. The short-term is explains the short span of investing the money in the company shares but the long-term equity is the time when the short-term equity financing is expired the company offers the opportunity to the shareholder to stay with the company for a longer period. The log-term investor gains on long-term equity financing is high. The shareholder can earn more dividend on the shares, but at the same time the risk of changing the prices of a share in future will also become higher. Most of the long-term contract states after the expiration of short-term equity contract. It is also the long-term funding strategy of financing, organizational activities[Tin96]. Debt funding strategies Debt funding is the borrowing of money for a fee. A lender borrows a loan in debt funding on strict conditions and fees. It is a strategy of funding in which a lender understands that the full amount will be paid to a particular date in the future with interest. The debt funding strategy is mostly used by small businesses. The interest rate on each amount reflects the level of risk that is perceived by the borrower at the time of providing the loan. There are several types of debt funding strategies like the private placement of bonds, loans, convertible debentures, leveraged buoyant and many others. Factoring is the important funding strategy of debt funding. When accompany wants a cash immediately then it sells its account receivables to a factoring company and receive cash. After that the factoring company collects the money of account receivables from the customer. The factoring company charges often very high fees for factoring[Ste11]. References Kim00: , (Kim & Singal, 2000), Roh14: , (Tendulkar & Hancock, 2014), Goo84: , (Goode & Richard, 1984), Bar06: , (Ickes, 2006), McD06: , (McDonald & Robert, 2006), Les08: , (Dlabay & James Burrow, 2008), Mic13: , (Ehrhardt & Brigham, 2013), Tin96: , (Tinbergen Institute, 1996), Ste11: , (Bragg, 2011), Read More