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Questions and Answers
What is the primary purpose of capital markets?
What is the primary purpose of capital markets?
Which of the following is NOT a function of the capital market?
Which of the following is NOT a function of the capital market?
What rights do equity shareholders typically NOT have?
What rights do equity shareholders typically NOT have?
What type of shares are characterized by a fixed rate of dividend?
What type of shares are characterized by a fixed rate of dividend?
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In the event of a company's liquidation, who has priority in capital repayment?
In the event of a company's liquidation, who has priority in capital repayment?
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Which characteristic differentiates equity shares from preference shares?
Which characteristic differentiates equity shares from preference shares?
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Debentures can be defined as what?
Debentures can be defined as what?
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What feature is NOT associated with preference shares?
What feature is NOT associated with preference shares?
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What is the main difference in the status of holders between shares and debentures?
What is the main difference in the status of holders between shares and debentures?
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Which statement accurately describes the rights associated with debentures?
Which statement accurately describes the rights associated with debentures?
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What type of loan allows a borrower to draw up to a specified limit and only pays interest on the drawn amount?
What type of loan allows a borrower to draw up to a specified limit and only pays interest on the drawn amount?
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Why are preference shares considered a hybrid form of financing?
Why are preference shares considered a hybrid form of financing?
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What happens to equity shareholders during company dissolution?
What happens to equity shareholders during company dissolution?
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Under what condition can preference shareholders claim voting rights?
Under what condition can preference shareholders claim voting rights?
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Which type of short-term financing involves charging a commission for service?
Which type of short-term financing involves charging a commission for service?
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What is the key characteristic of term loans provided by banks?
What is the key characteristic of term loans provided by banks?
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Study Notes
Capital Market
- Consists of organizations, suppliers, users of funds, and agencies that facilitate long-term funding.
- Businesses use it to obtain funds for long-term investments.
Capital Market Functions
- Investment Avenue: Maximizes returns for investors.
- Liquidity: Investors can easily convert securities into cash.
- Capital Availability: Provides borrowers with funds at reasonable rates.
- Fund Transfer: Facilitates the movement of capital claims.
- Capital Formation: Directs public savings to productive channels.
Equity Shares
- Shares without special rights regarding dividend payments or capital repayment.
- No fixed dividend rate.
- Shareholders bear the greatest risk; losses can be total in case of company failure or liquidation.
- Raised capital is called equity share capital.
- Shareholders have voting rights in company management.
Preference Shares
- Shares with preferential/priority rights.
- Fixed dividend rate.
- Preference shareholders receive capital repayment first during liquidation/winding up.
- No voting rights.
- A hybrid form of financing.
Equity vs. Preference Shares
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Equity Shares:
- Low nominal value.
- Dividend paid after preference dividends.
- Capital repayment after preference shares.
- Variable dividend rate (dependent on profits).
- Full voting rights.
-
Preference Shares:
- High nominal value.
- Dividend priority.
- Capital repayment before equity capital.
- Fixed dividend rate.
- No voting rights (or limited rights if dividend delayed).
Debentures
- Represent borrowed funds by a company.
- An undertaking to repay a specified sum with interest to debenture holders.
Shares vs. Debentures
-
Shares:
- Part of owners' funds.
- Holders are owners.
- No guaranteed dividend.
- May or may not have asset security.
- Voting rights.
-
Debentures:
- Part of borrowed funds.
- Holders are creditors.
- Guaranteed interest.
- Usually secured by assets.
- No voting rights.
Short-Term Loans by Commercial Banks
- Term Loans: Medium-term loans secured by assets or guarantees, repayable in installments or lump sum.
- Cash Credit: Formal credit arrangement, up to a credit limit, with interest charged on the amount withdrawn.
- Discounting Bills: Short-term financing for businesses by discounting bills of exchange, with a commission charged.
- Overdraft: Allows current account customers to overdraw, with interest on the overdrawn amount.
Equity Shareholders as Risk Bearers
- Dividend rates depend on company profits.
- Holders can lose their entire investment if the company is liquidated.
Preference Shares as Hybrid Financing
- Combine characteristics of equity shares and debentures.
- Dividends paid only from profits.
- Fixed dividend rate, similar to debentures.
Preference Share Voting Rights
- Can claim voting rights if dividends are unpaid for two or more years (cumulative) or three or more years (non-cumulative).
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Description
Explore the essential concepts of capital markets, including the functions they serve and the types of shares available. Understand the roles of equity and preference shares in facilitating investments and managing risks for shareholders. Test your knowledge on how capital markets contribute to long-term funding.
