ECS3701
Assignment 2 Semester 1 & 2 2021
Unique #: 626172
QUESTION 1
Discuss how collateral and indirect finance are used in explaining the basic facts about financial
structure around the world.
Collateral is a prevalent feature of debt contracts for both households and businesses. Collateral is property that
is pledged to a lender to guarantee payment in the event that the borrower is unable to make debt payments.
Collateralized debt (also known as secured debt to contrast it with unsecured debt, such as credit card debt,
which is not collateralized) is the predominant form of household debt and is widely used in business borrowing
as well. The majority of household debt in South Africa consists of collateralized loans: Your automobile is
collateral for your auto loan, and your house is collateral for your mortgage. Commercial and farm mortgages,
for which property is pledged as collateral, make up one-quarter of borrowing by nonfinancial businesses;
corporate bonds and other bank loans also often involve pledges of collateral.
Indirect finance, which involves the activities of financial intermediaries, is many times more important than
direct finance, in which businesses raise funds directly from lenders in financial markets. Direct finance involves
the sale to households of marketable securities, such as stocks and bonds. The 43% share of stocks and bonds
as a source of external financing for American businesses actually greatly overstates the importance of direct
finance in our financial system. Since 1970, less than 5% of newly issued corporate bonds and commercial
paper and less than one-third of stocks have been sold directly to American households. The rest of these
securities have been bought primarily by financial intermediaries, such as insurance companies, pension funds,
and mutual funds. These figures indicate that direct finance is used in less than 10% of the external funding of
American business. Because in most countries marketable securities are an even less important source of
finance than in the United States, direct finance is also far less important than indirect finance in the rest of the
world.
QUESTION 2
Differentiate between the main factors in the initiation of financial crises between the advanced and
emerging market economies.
Financial crises in advanced economies can begin in several ways: mismanagement of financial liberalization/
Assignment 2 Semester 1 & 2 2021
Unique #: 626172
QUESTION 1
Discuss how collateral and indirect finance are used in explaining the basic facts about financial
structure around the world.
Collateral is a prevalent feature of debt contracts for both households and businesses. Collateral is property that
is pledged to a lender to guarantee payment in the event that the borrower is unable to make debt payments.
Collateralized debt (also known as secured debt to contrast it with unsecured debt, such as credit card debt,
which is not collateralized) is the predominant form of household debt and is widely used in business borrowing
as well. The majority of household debt in South Africa consists of collateralized loans: Your automobile is
collateral for your auto loan, and your house is collateral for your mortgage. Commercial and farm mortgages,
for which property is pledged as collateral, make up one-quarter of borrowing by nonfinancial businesses;
corporate bonds and other bank loans also often involve pledges of collateral.
Indirect finance, which involves the activities of financial intermediaries, is many times more important than
direct finance, in which businesses raise funds directly from lenders in financial markets. Direct finance involves
the sale to households of marketable securities, such as stocks and bonds. The 43% share of stocks and bonds
as a source of external financing for American businesses actually greatly overstates the importance of direct
finance in our financial system. Since 1970, less than 5% of newly issued corporate bonds and commercial
paper and less than one-third of stocks have been sold directly to American households. The rest of these
securities have been bought primarily by financial intermediaries, such as insurance companies, pension funds,
and mutual funds. These figures indicate that direct finance is used in less than 10% of the external funding of
American business. Because in most countries marketable securities are an even less important source of
finance than in the United States, direct finance is also far less important than indirect finance in the rest of the
world.
QUESTION 2
Differentiate between the main factors in the initiation of financial crises between the advanced and
emerging market economies.
Financial crises in advanced economies can begin in several ways: mismanagement of financial liberalization/
