Boboland Restaurant is a new player in the restaurant industry in Australia. It is a small locally owned restaurant business with friendly and pleasant atmosphere for customers in a well-designed, and productive environment in which people can work happily. The restaurant is in a comfortable, familiar, small town that has a strong need for additional dining options. Bolstered by the need for more choices in family-oriented dining experiences, combined with the option for home-delivery, the restaurant is positioned to take advantage of the market need. Consequently, Boboland Restaurant needs funds for capital investment but this restaurant is too small to sell its debt and equity directly to investors and it has neither the expert knowledge nor the reputation and money to transact in wholesale markets. Thus, Boboland Restaurant needs to raise funds through financial institutions. The role of financial institutions is essential in indirect financial market. At the same time, when a financial institution makes a loan or invest in a bond or other debt security, it bears risk of accepting the possibility that the borrower will fail to make payments in the amount and time promised. They also have to bear the risk of fluctuations in a security's price or reinvestment income. In a same direction, the actions of Australian or foreign governments will result to a risk of fluctuation in the value of financial institutions. In their search for higher long-term earnings and stock values, financial institutions must manage and balance all these risks. In order for financial institutions to function well, they need to be regulated. In addition, they function in an environment in which asymmetric information is more the rule than the exception. A range of legislation influences the operations of financial institutions in Australia. APRA is responsible for the prudential regulation of Australian authorised deposit-taking institutions (ADIs), insurance companies and superannuation entities. On the other hand, Livois Energy Limited is a large corporation established in 1970 and well-known with excellent credit ratings from a recognized credit rating agency. Livois Energy Limited has a strong name in the market. Since Livois Energy Limited enjoys high ratings from rating agency, it often uses Commercial Paper (CP) to diversify their sources of short-term borrowings in money market. Commercial paper, or corporate paper as it is sometimes called, is a name for short-term, unsecured promissory notes, typically issued by large corporations to finance short-term working capital needs. Commercial paper is one of the oldest money-market instruments. Firms issuing FIN226 (FAA) / Page 3 of 7 commercial paper can sell it either through an underwritten or non-underwritten offer. Apart from being a cheaper sourceof funds, it helps meet funding requirements relatively quickly for better-rated corporates. Required:

(a) Based on the case above, what choice does Boboland Restaurant has to raise funds? (2 marks)

(b) How do commercial bank acts as intermediary in 'a'? Illustrate your answer with a diagram. (10 marks)

(c) The process in which commercial banks acts as an intermediary is called "financial intermediation". Briefly explain this process. (2 marks)

(d) Describe the relationship between commercial and investment banks? (10 marks)

(e) Insurance companies (intermediary) also invest into debt and equity securities using the funds that they receive when they sell insurance policy to individuals and businesses. Once they sell the insurance policy, they have accepted the risk from the insurance purchasers. Define this risk and explain the ways in which insurers can reduce this risk in their operations. (10 marks)

(f) Describe THREE (3) types of risks faced by financial institutions mentioned in one of the above cases. (6 marks)

(g) Discuss why Livois Energy Limited should not use Commercial Paper (CP) as a permanent source of funds apart from being a cheaper source? (4 marks)

(h) Should Livois Energy Limited issue Commercial Paper (CP) through an underwritten or nonunderwritten offer? Discuss in detail. (6 marks)

(i) Prudential supervision of ADIs in Australia is the responsibility of APRA. Does APRA guarantee depositors' funds? Explain in detail. (10 marks)