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Econ 2050, Money and Finance
FINAL EXAM

Assessment Type: Open book Final Examination Session 1 2020
Access via: Turnitin link on Assessment Module of the Unit iLearn page
Date and time: 7:30 AM to 1:30 PM, June 24, 2020
Content:
Three compulsory questions worth 20 marks each. The test is marked out of 60, and contributes
50% of your final grade for the unit.
Maximum word length for each question is 1,200 words.
All three questions to be answered in the same document. The completed Exam is to be
submitted as a PDF File.
The Exam is designed to be completed in 2 hours and 40 minutes.
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that if you want to the full allocation of time to complete your exam you must open
your question file no later than 10:50 am (AEST) on June 24, 2020.
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Answered Same Day May 28, 2021 ECON2050 Macquaire University

Solution

Komalavalli answered on Jun 24 2021
149 Votes
Q1.
Financial securities used by private firms to raise long term capitals:
The financial securities used by private firms are Capital and equity securities
Under capital securities the private firm raises their capitals by issuing
1. Corporate bonds 2.Hy
id securities 3. Junk bonds 3.covered bonds 4.Equity securities.
1. Corporate bonds:
It is a debt contract issued by a firm to raise funds along with the payments of period coupon
interest rate and the repayment of the principal debt amount at maturity time. It is either secured
or unsecured bonds. The bonds that are secured with an underlying assets is said to secured
onds, if the firms fails to repay the principal amount by selling the underlying assets firm will
epay back the principal amounts to the bond holders. These bond issuance has two types of
debentures fixed and floating. Fixed debentures indicates collateral claim over the assets owned
y a firm. Under floating debenture the bond holder get payments only after settling the fixed
debenture bond holders. Some bonds are backed up with sinking funds, which indicates the
proportional amount of face value is paid at each year.
Corporate bonds differ greatly in maturity period, their maturity period usually lies in between 2
and 30 years. Risky bonds have low rating from investment analytics company like moody s&p
etc, whereas low risky bonds have high rating from these companies.
2. Hy
id securities:
This security has characteristics of both bond and equity. It allows the both secured and
unsecured bonds to equity shares. It gives the benefits to bondholder to rise stock prices, while
delivering low interest payments to issuers. Many convertible bond has the characteristics of call
option, that allows the issuer right to force the conversion. Convertible bond has a feature of
preference shares.
3. Junk (High yield bonds)
It is mostly offered by companies that are having high credit default risk. This type of bond
having lower rating often offer high interest rate. Junk bonds have relatively lower market, so
companies who are high default risk often raise their funds through banks credit.The maturity
period of this bonds varies from 1 to 4 years.
4. Covered bonds:
Covered bonds first came into Australia in 2011 and it is issued through banks .These bonds are
acked with pool of assets. This type of bonds mostly receive credit rating of AAA.This bond
has lower yields.
Equity securities are 3 types they are:
1. Ordinary shares
2. Preferential shares
3. Convertible securities
1. Ordinary shares:
This indicates a basic form corporate ownership .when company defaults the shareholders won’t
get any amount but they loss only their investment on the percentage of share holdings.
Companies pay dividends to the share holder based on their profits. There will be no dividend
payments when company earns zero profit/loss
2. Preferential shares
Like ordinary shares the companies will pay their dividends, the only difference is that they give
preference to this shareholder in terms of claims over company assets during the event of default.
Types of preferential shares are Non participating preference shares: prefe
ing constant
dividends i
espective of huge profit earning .Cumulative preference share this require a firm to
pay a
ears to the preference shareholders dividend...
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