Question

Managing in Financial Markets

As a financial manager of a large firm, you plan to borrow $70 million over the next year.

     a. What are the more likely alternatives for you to borrow $70 million? (5pt)

         

     b. Assuming that you decide to issue debt securities, describe the types of financial institutions that may purchase these securities. (5pt)

4- Distinguish between primary and secondary markets. Distinguish between money

and capital markets. ? (5pt)

Answer 1

A.

The first alternative to borrow $70 Million, is the approach to the bank or group of banks as a consortium that can provide the funding of this amount. It is the least costly alternative as the amount is not so big and this alternative will cause the large firms is to keep the transaction cost to be lower side. The second alternative is to issue debentures as bonds to the public and or institutions where they can buy these bond securities and the firm can get funds of $70 Million. The third alternative is to go for the public issue of shares to collect $70 Million to the stock market. But, it will be the most expensive alternative to the firm and transaction cost will be very high. The fourth alternative is to go to venture capitalist organizations who can take the share of ownership and provide the required capital.

Besides, the firm can also opt for the partial funding of $70 Million that can come from the their own cash reserves reserves and surplus.

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B.

The first type of institutions are the investment banking firms who can buy the securities and provide funding to the firm. The second type of institutions are debt funds based mutual fund companies who want to invest in debt securities that can give better yields. The third type of institutions are banks who are allowed to invest in debt securities and gain additional income. The fourth type of institutions are non-banking financial institutions such as housing finance companies. The fifth type of institutions are insurance companies that can buy a portion of debt securities issued by the firm.

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4.

Primary market is the market where the securities for the public issue is launched and listed for the first time. In contrast to it, the secondary market is the market where securities are traded among the sellers and potential buyers. So, securities when issued, go to the primary market for listing and raising funds for the firms, and then it goes to the secondary market for trading among the buyers and sellers.

Money market is a market for short term securities (maturity period to be less than 1 year) and capital market is the market for long term securities ( maturity period to be more than 1 year). Money market is a virtual market, though capital market has its stock exchange in physical form. But, capital market also operates in real time via electronic applications.