BA1 Chapter 3 Flashcards
(23 cards)
What are the different financial markets?
Capital Markets - Stock market for shares and bonds
Money markets - Short-term debt financing and investment
Commodity markets - oil, metals etc
Derivatives markets - instruments for the management of financial risk
Insurance markets - facilitate the redistribution of various risks
Foreign exchange markets - trading forex
What are the roles of intermediaries?
Risk Reduction
Aggregation
Maturity transformation
Financial intermediation
How do businesses deal with cash flow problems in the short, medium and long term?
Short term- Overdraft
Medium term- Loans leasing
Long term- equity and loans
How do governments deal with cash flow problems in the short medium and long term?
Short term- Central bank credit facility
Medium term- Loans and bonds
Long term- Loans and bonds
What are some of the considerations when assessing financial products?
Yield/Cost Risk Time periods The amounts involved Liquidity Transaction costs
What is the difference between capital and money markets?
Capital markets are usually for more than a year and include bonds and mortgages
Money markets are less than a year and include CDs and bills of exchange
Name the characteristics of ordinary shares (equity)
Return: Potentially very high
Risk: Potentially very high
Timescales: long term
Liquidity: Good for quoted companies
Name the characteristics of bonds
Return: Low
Risk: Low
Timescales: Vary from short term to long term
Liquidity: Good if quoted companies
Name the characteristics of Certificates of deposit (CD)
Return: Very low
Risk: Very safe
Timescales: 3 to 6 months
Liquidity: Can be sold on the money market
Name the characteristics of Credit agreements
Return: Usually very high interest
Risk: The credit card company faces the risk
Timescales: Usually short-term
Liquidity: Debt cannot be sold by lender but debt may be repaid earlier usually
Name the characteristics of Mortgages
Return: Usually relatively low
Risk: Usually low
Timescales: Long-term
Liquidity: Can be sold by lender in form of CDO. The borrower may repay loan early with possible penalties
Name the characteristics of bills of exchange
Return: The difference between the discounted amount of which it is sold/bought and the full face value
Risk: Level of risk varies
Timescales: Short term
Liquidity: Can be resold on the money market
How do you calculate yield on equity?
Dividend yield= (dividend per share/share price) * 100
How do you calculate the running yield on a bond?
Running yield= (annual interest/market value) * 100
Explain the term structure for interest rates
Lenders normally demand higher interest rates on loans as the term to maturity increases
What is the difference between the real and nominal interest rates?
Nominal interest rate is the simple % interest per annum
The real interest rate is the return after inflation has been taken out
What are the two types of financial intermediaries?
Deposit-taking institutions (DTIs) such as banks and building societies
Non-deposit-taking institutions (NDTIs) such as insurance companies, pension funds and investment trusts
Break down the types of banks
Investment banks
Commercial banks
- Retail banking
- wholesale banking
What is a cash ratio?
10% of deposited cash will be withdrawn, leaving the rest for loans and investments
Formula for change in total deposits
Change in total deposits = (1/cash ratio) * the initial cash deposit
What is the role of Central banks?
Banker to other banks
Banker to the government
- Bank accounts for government departments
- Operates monetary policy
- Raising/redeeming funds and managing the national debt
- Manages the reserves of foreign currency
Supervises banking system
- Manages liquidity
- Lender of last resort
What are characteristics of a money markets
Treasury bills, commercial bills, CDs and short term debt
Used by banks, companies, local authorities and the Government via discount houses
What are characteristics of the stock markets
Full equity market
-Primary and secondary markets in ordinary shares, preference shares and debentures
Alternative investment market (AIM)
-For shares in smaller companies
Government bonds
- Fixed certain price
- Main buyers are pension funds and life assurance companies
