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    Hank to dubai

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    © All Rights Reserved
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    9 views25 pages

    Adobe Scan 2 Jun 2022hankak

    Uploaded by

    Neeraj Maurya
    Hank to dubai

    Copyright:

    © All Rights Reserved
    Download as PDF or read online from Scribd
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    of 25
    2 Liquidity surpluses and deficits The lack of synchronisation between payments and receipts, has a variety « origins and affects individuals, busin esses and governments. 2.1 Individuals The lack of synchronisation in payments and receipts for individuals can occur in the short, medium and long term. Receipts Household income comes in a variety of forms. The main ones being: wages and salaries . income from investments, Property and savings social security and pension payments. common feature of these is that th regular but not continuous. Typically nd bonuses annually) as are social income from investments may be mo wages and salaries are Security and pension 1@ flow of such income tends to be © paid monthly Payments. annually OF annually. payments nthly, but are more commonly bi- Payments Dealing with a lack of synchronisation Short term Consumption expenditure is typically more or less continuous and irregular. Most households spend some money every day but rarely exactly the same amount. Some payments may match receipts, for example monthly direct debits and monthly salaries but this relates only to certain types of expenditure. Households can: Tetain a stock of cash to meet day- to-day expenditure use credit such as credit cards and overdrafts facilities * save in periods when receipts exceed payments to finance periods when the reverse happens. In all of these cases, households use the services of financial intermediaries: bank accounts, credit cards and overdrafts. Note: there will also be times when individuals have a surplus of funds and would thus look for opportunities to invest and earn a return. There are a wide range of deposit accounts available with different yields, time periods and conditions over withdrawal (e.g. notice periods). mt ———_—— on The infrequent purchase of Wer dium , be expensive items such as term * consumer durables, including cars * holidays and «medical bills. Again these expenditure flows are unrelated to the flow of income. The solutions for households ag . broadly twofold: iy | * — to save over a period of prior to the purchase * to borrow and repay over a period of time. time Again both of these require appropriate financial instruments; in the first case efficient means of saving such as deposit accounts, and in the second case, cost effective means of borrowing, including bank loans and consumer credit. Long Even in the long term there term may be a mismatch between payments and receipts. This arises from the very long-term nature of some income and spending decisions. Examples of this include: * housing property * savings for pensions. A range of specialist mortgage products have been developed to enable people to buy property. A range of specialist pension products have been developed to help people to generate income for when they retire and no longer receive a salary. 2.2 Business As with individuals, businesses will find that flows receipts rarely match. This is often referred to as can occur in the short, medium and long run, Receipts of payments and flows of the cash flow problem and payments — ] Pamens — Dealing with a lack of businesses. Examples where this may arise include: sales revenue is received long after the first costs are incurred such as in building and construction activity, shipbuilding and aerospace where contracts specify part payments long before delivery reorganisation costs are incurred before benefits from lower costs or increased revenues are achieved. ea short |All business have er - Synchronisation term day costs to meet: o businesses the solutions tothis 28h flow problem are: * Wages and Salaries se : a Telaining a large stock of pauler flow of physical | tomeet perioss flower cel inputs Such as ener delayed income raw materials ang © acces components SS to credit, for example oe oa Of Various kinds to . for Ineffect, businesses need |, eee working capital, access to overdraft facilities with their banks, (Of course when receipts are lower than payments businesses need [access to credit and overdraft faciities, but when the reverse happens secure, and preferably Profitable, savings instruments are required, Medium |Cash flow issues might [Businesses thus require medium- term arise in the medium term for term finance, typically 2-3 years, to meet these medium-term financial problems. stem | These activites may invong -term financing it ve fee Sor aise large capital outlays with thes term pr Prog, | d incomes delayah! Sh, ent__oieesse incomes cing outof a aetee take aint the fare Businesses’ nt activities. long-term finance and have threg variety of forms main options: hysical Pee eer ea OF internally Gener capital an oy . tment in long-term : poceen dp * equity capital through thy issu Development of shares ammes (RED) |. debt capital includin prog ing ah N29, * take-overs and mergers bank borrowing and bonds, of existing businesses In the latter two cases, busin 25 need access tothe capital ma [sources of funds for fo Ng-term investment. cae | 2.3 Government Receipts ‘The government may y have some income from profitable state j charges made to consumers for state-provid: its income comes from taxation. The main s industries or led services, but the vast bulk of Ources of taxation revenue are- @ range of indirect taxes (Sales taxes) such as value added tax and excise duties on alcohol, Petrol and tobacco products: direct taxes on individuals most importantly income tax and social security taxes direct taxes on business organisations Such as corporation tax. Some ofthese fous of taxation ‘even are quite regular, such as income ‘ax paid through the aV-28-You-eam system in the United Kingdom, but many are not. The flow of ‘eceipts from corporation tax, for example, can be very uneven with significant Payments towards the end of the tax year. This, 88 with households, impliag @ problem of Synchronisation of payments and payments Payments Dealing with a lack of synchronisation Short |In the short term, Most of these payments are spread term | governments must finance their day-to-day activities such as: * payments of wages and salaries to government employees * payment of social security and state pensions to the unemployed and the retired * payments to providers of goods and services to enable the day-to-day running of the government activities. over the financial year and are relatively stable from one month to another. It is therefore difficult to match tax revenue to the payments made for these items. Thus the government, like households, needs short-term financial facilities so that it can meet its day-to-day running expenses. The credit and savings needs of government in this respect are often met by the central bank, one of whose functions is to act as banker to the government and to manage the government's finances. mi ~*~ Governments engage in investment when they finance such as: school and hospital building Construction projects for the economic infrastructure, for example motorway and railway construction loans to private sector activities to help finance investment by those organisations; this typically occurs in high technology and tisky activities such as aerospace. Payments Dealing with a lack of synchronisation Medium | Governments also have medium- | These expenditures are no term | term financial commitments that likely to be evenly spreag largely arise from investment over the years. Indeed, activities in the public sector. governments may deliberately concentrate such expenditures in some years rather than other as part of a fiscal policy designed to manage the trade cycle. In this case, government wi raise such expenditure in recessions exactly when receipts from taxation are likely to be low as consumer incomes and Spending fall. Thus governments may run budget deficits which have to be financed by borrowir from the private sector. Long term Governments often take responsibility for financing very long-term investment projects in the development of the infrastructure of the economy, for example nuclear power and telecommunications. : Since it is possible for governments to be net savers or net borrowers over very long periods of time, they may need the services of financial intermediaries over that period. Itis more likely that governments will be net long-term borrowers: * — given that the projects such as nuclear power are investments, not current consumption, borrowing is an acceptable means of finance for these projects governments can continue to borrow in the very long run as long as there is sufficient taxation income to finance the subsequent debt. Even if governments do not engage in additional long-term borrowing, all have debts accumulated from the past — the national debt. This must be managed as there is no real Possibility of repaying it. Thus governments need the services financial intermediaries to Manage and renew this deht There are financial problems for businesses when there is a lack of synchronisation in the flows of payments and receipts. The financial needs of business vary and take a variety of forms. In general their needs can be classified as: * funds to finance day-to-day business including payments for wages | and salaries, raw materials and components — working capital, * funds to finance the purchase of new capital equipment or to finance acquisitions and mergers — investment capital, | * suitable instruments for investing any surplus funds as partof the | asset management function. | |n acquiring funds to finance their activities, businesses have alarge | range of different types of financial instruments from which to choose. | But in making the choice, businesses will follow a general rule that the instrument should be appropriate to the use to which the funds are to be put. Thus: | | | short-term instruments should be chosen to finance the short-term | needs of working capital: long-term instruments should be chosen to finance the long-term needs of investment. With the investment of surplus funds a similar rule is generally adopted and the instrument chosen will be balanced between Profitability and the needs to match the term of the instrument to the period during which the funds will not be needed. In most economies and for most businesse: : , the bulk of the financial needs of those businesses are met by internally generated funds. For the rest of their financial needs, businesses can employ a range of financial instruments. The most important of these are: | Short-and medium-term instruments These are typically acquired from the mo! 1 ney markets. The most important are: * short-term bank loans and overdrat fis, the latter are expensi avoided if possible; xpensive and * bills of exchange, these are typi ically of 3~6 months durati with a promise to repay at that uration are solc date: | (Tights issues’) can be issued 6 2S! Paper whic companies; hare det Securities ig UCM by the largest + trade credit which all A OWS busin, materials, components business sc delay Payment foray + leasing and hire purchase 62S, et, Se have » to meet the short- and mediy de range of 7 : cial instruments ae Sei been a persistent con ins bins, ieee anal ane le System ha; been Poor at meet; NY Countries over ne Reuly established businegs 9 he Financia grou various government measures dea SS: Ti expaing small business sector, sig Ned Specifically to help the thu Long-term instruments In meeting their long-term financi ial nee choice between two forms of on eds, businesses have abroad 1g-term finance: * equity finance * debt finance. Equity finance is available to li E imited liability companies through the issue of shares. For publicly q luoted companies, additional shares Via the Stock Market. This is discussed in the next section. The alternative is long-term borrowing. This might be done by long-term commercial paper for the largest fi ims. Funds may also be raised by forms of Preference Shares on which fixed rates of interest are paid and mortgaged Although there is a wide choice of instruments for larger firs, especialy those quoted on the stock market, there have been problems in many €conomies for small and new businesses. A persistent complaint has been the difficulty that small firms face in acquiring the finance they need from the financial system. In response many governments have created a series of initiative designed to meet the specific financing needs of ‘small firms. it i i th debt and equity Mezzanine finance, in effect, combines aspects of bot! I france, Although the finance is intaly Given as loan (bt capita), the lender has the rights to convert to an ‘equity interest in the company i | the loan is not paid back in time and in full stem | 3.2 Capital and money markets The time to maturity has traditionally been used to make a distinction between ‘capital’ markets and ‘money’ mat * Capital markets — maturities > 1 year - examples include equities, bonds and mortgages + Money markets - maturities < 1 year ~ examples include certificates of deposit and bills of exchange 3.3 Ordinary shares (‘equity’) ie hares. Ordinary Ownership of companies is conveyed via ordinary shares. shareholders also have voting rights. Shares have a nominal or par value (eg. £4 ords’), which is usually different from the market value if quote Companies often raise funds through the issue of shares. ——— Characteristics Return * Potentially very high returns if the company is Profitable. Retums will be in the form of dividends andlor increases in share prices. Risk * Shares carry high risk. lf company profits fall, then there is a danger of zero ot low dividends, combined with a fall in share value. Furthermore, if, in a worst case scenario, the Company gets liquidated, then the shareholders only et paid if there is any money left after settling all other claims. In such situations the shareholder usually get nothing, Timescales | The company usually has no intention of buying back the shares, so equity is considered long-term. Liquidity * for unquoted companies it is very difficult to sell the shares but for quoted companies the shares are highly liquid, so investors can "cash in* at any point. 3.4 Bonds Just as the total broken down into smaller units (e.g, one bond may hi Value of £100). Different varieties include debentures and loan stock and may be issued by companies, local authorities and governmental organisations, equity of a company is spit into shares, loans may be iave a nominal or par ads will normally have a nominal value (e.g. £ a and redemption terms (e.g. redeem at Par i igthe product of the nominal value and the £50 per annum). 1,000), a coupon rate (e.g. in 2015). The annual interest Coupon rate (e.g. £1,000 x 5% = Characteristics Return Typically bonds have low r " ‘eturns because they are a lower risk investment. 7 Returns will be in the form of interest and (possibly) gain on redemption. Risk Bonds are usually lower risk than equity. For example the bonds may be secured and the interest rate fixed. Note: you can get high-risk, unsecured ("junk") bonds as well. Timescales The maturity is defined on the bond and varies from very short term (e.g. Treasury Bills) to long term (e.g. 25-year corporate bonds). Some bonds are redeemable but others irredeemable. Liquidity If the bonds are unquoted then the investor has no choice except to wait for redemption. However, if quoted, then they will be easier to liquidate by selling on bond markets. For example government bonds are usually very liquid. Note: high risk bonds will be sold at a large discount on face value. “ey bertificates Of deposit (‘cD’) ACD states th; ‘ ‘ rat P time, at the end of deposit has been made with a bank for a fixed periog of of which it wil id with it jini invested is £50,000 itwill be repaid with interest. The minimum amount Characteristics Return * — Very low returns due to low risk Risk * Very safe. Timescales * 3nd 6 month maturities are the most common. Liquidity * Can be readily sold on money markets 3.6 Credit agreements A credit agreement is an arrangement where one party borrows or takes : Possession of something in return for future payment. For example — credit cards and store hire purchase contracts. Characteristics Return * — Usually high interest rates. * For example, store cards typically cost around 25 — 30% per annum. Risk * The credit card company faces the risk of default — that the card holder will not repay the amount borrowed — as such cards are usually unsecured. Timescales * Usually intended to be short term, although some individuals can get into financial difficulties by Tunning up large debts on credit cards that they cannot repay, Liquidity i. The debt cannot be resold by the lender but the borrower may be able to repay early if funds permit. 3,7 Mortgages ae mortgage is a loan to finance the Purchas

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