Money Flashcards
Characteristics of money (6)
Durability
Limited
Acceptability
Divisible
Portability
Hard to counter fit
Functions of Money
• Median of exchange
• Unit of account (understandable and comparable)
• Method of deferred payments (loans)
• Store of value (asset value)
Narrow money
Money in forms that can be used as a median of exchange generally notes coins in certain balances held by banks
Broad money
Money in any form including bank or other deposits as well as notes and coins
Money market
Market for ST loans and finance for businesses and households (up to 1 year)
Capital market
Market for medium to long term finance, securities such as shares and bonds to raise financing med to LT
Role of financial markets in the economy (5)
• Facilitates saving by households and businesses
• Lend to businesses and individuals
• Facilitates exchange of G/S
• Provide markets in currencies and commodities
• Provide a market for equities
Debt financing
Borrowing money from an outside source with the promise of paying back the borrowed amount plus agreed upon interest at a later date
Debt financing examples
• Loans
• Overdrafts
• Mortgages
• Bonds
• Credit cards
Equity financing
Raising capital via selling shares
Equity financing examples (3)
• Angle investors
• Venture capital
• Stock market listing
Advantages of debt financing (3)
• Less capital required to be invested by shareholders
• Relatively cheap source of finance
• East to pay interest in profits and cash
Disadvantages of debt financing (2)
• Business vulnerable to unexpected changes in IR
• Business have less control of events if they are highly geared (high ratio of debt to equity)
Advantages of equity financing (2)
• Risky capital and does not offer a fixed return businesses have some control over when/if to pay dividends
• Flexibility: can raise fresh equity capital at different stages of business development
Disadvantages of equity finance (2)
• Dilution if ownership
• Growing expectations over time that dividends will be paid
