Finance Questions Essay

673 words - 3 pages

Finance coursework
Question 1:
i) A personal loan from one of their family members or friends could be suitable as they are just a small start up business. It may be advantageous as this loan would be given on flexible terms because friends and family may agree to a longer repayment period than banks and may seek a lower rate of return than other lenders. Also, little or no security may be required and the repayment can be tailored to their financial projections. Moreover, it would be cheaper for them as friends and family members may only have minimal charges as funds are offered at little or no interest. There will also be little or no formalities as the family members or friends already know the business circumstances and so are less likely to demand a detailed business plan.
However, disputes may arise if there is a delay or nonpayment and this may break relationships and lead to mistrust.
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Moreover, the payments made are generally fixed and will not therefore change as interest rates change which will help the planning of the business.
However they may end up paying more in the long run because leasing is almost always more expensive than purchasing and also they will be obligated to keep paying even if they stop using the equipment depending on the lease terms.

ii) A bank loan would be suitable for this situation. A bank loan is an amount of money borrowed for a set period within an agreed repayment schedule. The repayment amount will depend on the size and duration of the loan and the rate of interest. The advantages of taking a bank loan are that the business is guaranteed the money for the agreed period and while interest must be paid on the loan, there is no need to provide the bank with a share in the business.
However, the banks may ask for security over the assets of the business so this makes the bank become a secured creditor with collateral over the business assets. Another disadvantage of a bank loan is it’s relatively lack of flexibility as it may find itself paying an interest for an amount more than what is required. Moreover, the loans have a rate of interest attached to them and this can vary according to the way in which the Bank of England sets interest rates and it can be high. If interest rates rise then it can add to business costs.

Question 3:
e) The spot exchange rate is the price for immediate exchange. Immediate usually means within two working days. However, the forward exchange rate refers to an exchange rate that is quoted and traded today but for delivery and payment on a set future date so the exchange takes place at some specific time in the future, often 30, 90, 180 days.
ii) Interbank exchange rate: 1 GBP= USD 1.56661
Tourist exchange rate: 1 GBP= USD 1.5318
Interbank exchange rate is the rate banks or large financial institutions charge each other when trading significant amounts of foreign currency and people cannot buy currency at this rate, as they will be buying relatively small amounts of foreign currency.
A tourist exchange rate is the rate at which banks sell foreign currency in exchange for local currency.

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