Finance Questions and Answers

6262 Words Apr 24th, 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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Examples, commercial banks, building societies, credit unions
• contractual savings institutions. Their liabilities (sources of funds) are contracts that generate periodic cash flows, such as insurance contracts and superannuation savings. Their accumulated funds are used to purchase both real and financial assets. Includes insurance offices and superannuation funds
• finance companies. Provide loans mainly to small business and retail customers. Also provide lease finance. No depositors, therefore they borrow funds in the money and capital markets to finance their activities
• investment banks and merchant banks. Specialise in the provision of off-balance-sheet advisory services such as providing advice on mergers and acquisitions, balance sheet structuring, risk management
• unit trusts and managed funds. A unit trust is formed under a trust deed. Investors purchase units issued by the trustee. The trust invests in specific asset classes (such as equity or property) within the terms of the trust deed

5. As an employee of the finance department of a corporation you are asked to explain the matching principle to an executive of the organisation. You know that you will need to give practical examples. What are you going to advise the executive?
Matching principal:
• short-term assets should be funded by short-term liabilities. Example, use a bank overdraft to finance the purchase of