Direct Finance and Indirect Finance - Coursework Example

The contrasting observation exists because indirect finance is more expensive compared to direct finance, as it involves the payment of high-interest rates charged by the FI. Therefore, organizations and companies operating in a young economy might not be in a position to sustain the interest rates charged when accessing indirect finance.
5. What is the relationship between the efficiency of a financial system and the rate of economic growth?

The efficiency of a financial system is directly proportional to the rate of economic growth. An efficient financial system means that there is a robust savings culture, easy access to funds for borrowers, and lower lending risks on the financial intermediaries (FIs) part. As such, the FIs can offer timely, creative, and innovative financial services. The availability of financial services for investors, organizations, and corporations means that there will be an observable growth rate in the economy. However, an inefficient financial system ultimately means that there would be a shortage of financial products and services. A drastic shortage of financial products and services means that organizations will not access enough funds for investments and expansion. Ultimately, the inefficient financial system will negatively affect the rate of economic growth.
7. Describe the major types of risks to financial securities, and give a specific example of each. How do investors measure risk?

Financial securities face two significant risks: unsystematic and systematic. The contrasting difference between the two major types of risks is that systematic risks are beyond the control of organizations while unsystematic risks are within the control mechanisms of organizations. An example of systematic risk is an inflationary risk. This risk has its origins in the fact that inflation erodes purchasing power. On the other hand, an example of unsystematic risks is liquidity risks. This risk emanates from the inability of an organization to access sufficient funds. There are numerous ways investors can use to measure risk (Horcher, 2013). For instance, investors use instruments such as standard deviation, drawdown, and beta ratios. The standard deviation is regarded as a primary risk measurement tool. It is a measurement of how an investment will fluctuate from the mean return.

9. What is liquidity, and why do investors care about it?

Liquidity is the availability of funds that enables investors and organizations to pay their bills and carry out investments with cash or from some assets, which can be turned into cash easily. Investors care about liquidity because it provides a fast and easy channel for obtaining funds or having cash at hand that enables them to respond swiftly to available and rising investment opportunities. In addition, investors who care about liquidity have peace of mind knowing that they can respond to unforeseen circumstances, which occasionally arise in the line of investments. Read More