Finance task Case Solution
Maturity transformation is a practice, which is usually initiated by financial institution in which they borrow money for a short period time,after which the amount of money is lent to the public. As a result of this, commercial banks could be faced with the risk of default from the borrower’s side, which would compromise its ability to make timely payments of the amount of money borrowed by the bank under the maturity transformation initiatives. Therefore, it can be determined that the time span for the amount of money borrowed by the bank should be shorter than the time span for the amount of money it lends out to potential borrowers available in the market.
The financial market is important for the investors as well as the companies operating. It permits the buying and selling of various resources including, company’s stock, commodities, securities foreign currencies and other financial instruments, therefore it can be evaluated that the financial market would directly affect the publically traded companies operating within the jurisdiction of the relevant law and procedures. This, as a result would provide the potential investors available in the market with a platform, thus enabling them to trade in different securities, which would allow them to gain higher returns by investing in different stocks after conducting effective research and analyzing the market risk and earning per share of the stocks, which should enable them to invest in good stocks, so that they could increase their expected returns(Fratzscher, 2002). Therefore, it can be determined that the financial market is mandatory for the success and well-being of the publically traded organization available in the market. However, the United States established securities and commission in 1934 with its core function to monitor and ensure that the organizations are presenting true and fair views of their financial statements so as to increase the investors’ confidence and allow them to make fair estimations regarding the company’s future performance based on true financial statements.
Furthermore, the financial intermediary is a process, where banks take money from the depositors and distribute them among borrowers, which, in turn, enables the banks to charge high interest rates when they are lending money to borrowers due to which they incur relative low interest rates when they receive money from depositors. Therefore, it can be determined that the financial institution can be profitable based on interest charge on borrowers. This financial intermediary’s initiative taken by the financial institutions would enable them to gain high interest rates or returns from the money lent to potential borrowers and save costs or interest rates on the money received from the depositors(Tarashey, et al., 2009). This, as a result, would provide the company with a cost advantage, while allowing them to ensure their long-term survival in the highly diverse and competitive market. Moreover, the direct lender would contract after negotiation in which the financial institution needs to determine the principle amount on which the interest rate would be charged on an annual basis where the banks approach to attain high interest rates from the borrowers. On the other hand, the borrowers’ approach would be to attain minimum interest rates; therefore, a compromised deal would be formed between the lender and the potential borrower. This, as a result, would enable the lending party and the borrower to drive potential benefit from the contract, which would increase the overall profitability of the financial institution and allow them to properly demand themselves from any future attacks from rival companies. Thus, this would enable the financial institution to maintain appropriate bad debt reserves, which would increase their ability to mitigate the risk of borrowers hence, defaulting in their loan payments and potentially providing adverse impact for the financial institutions. In the worst case scenario it would not be able to make its own loan payments, which would potentially ruin its own image, as well as lost of investors’ confidence in the ability of the financial institution to meet its liability obligations………….
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