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 Limit

d 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 commercial paper can sell it either through an underwritten or non-underwritten offer. Apart from being a cheaper source of funds, it helps meet funding requirements relatively quickly for better-rated corporates.

Questions:

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

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

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