Question

Briefly but clearly explain the following concepts:

a. Financial intermediary:

b. Inflation risk:

c. Equity finance:

d. Credit risk:

Answer 1

(a) Financial intermediary : It is an entity which acts like a middle man between two parties in a financial transaction such as commercial banks, mutual funds, investment banks etc. It offers benefits to consumers such as safety, liquidity.It helps an individual / firm to lend or borrow. It helps to facilitate the different needs of lenders and borrowers.

(b) Inflation risk: It implies that the risk arises from the decline in value of securities cash flow due to inflation , measured in terms of purchasing power. Inflation risk is also called purchasing power risk. It mean that cash flows from an investment won't be worth as much in the future because of changes in purchasing power due to inflation.

(c) Equity finance: It is the process of raising capital by selling shares of the company to public. It is essentially refers to the sale of an ownership interest to raise funds for business purposes. It is typically used as seed money for business start ups or as additional capital for established businesses.

(d) Credit risk: It is the risk that the borrower may not repay a loan and that the lender may lose the principal of the loan or the interest associated with it. It is defined as potential that a borrower or counterparty will fail to meet its obligations. It arises because borrowers expect to use fututre cash flows to pay current debts.