Question

In: Finance

4. [ 3 pts ]. Answer the following in a concise manner. (a) What is the...

4. [

3 pts

]. Answer the following in a concise manner.

(a) What is the difference between a loan, a cryptocurrency and a bond?

(b) What is the difference between the money market and the capital market?

(c) How can the stock option provision solve the principal-agent problem and reduce

agency costs?

Solutions

Expert Solution

A) loan is a debt which is provided by commercial banks and other borrowers but it is not tradable securities like commercial Bond because commercial bonds are debt instruments which can be traded.cryptocurrencies are new age currencies which cannot be regulated by any of the third party and they are encrypted and they are also traded on the crypto exchanges. Loans have no tradility whereas other two securities have high tradability.

B) money market are generally used for short term capital requirement whereas capital market are used for long term capital requirements and capital market will be providing with loans for the longer period of time and money market and generally associated with the working capital loan

instruments which are used in capital market are stocks as well as bonds whereas in money market one can use commercial deposits or bankers guarantee.

C)stock option provision will be solving the principal agent problem because employees will be feeling like they have also become the owner of the company because they will be thinking like shate holder when they will be having their stock exercisable after certain period of time so they will be trying to maximize the interest of the shareholder and it will be leading to solving of the conflict of interest.


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