Capital markets

Question 1

What are three main services of the capital markets and financial system?

Answer 1

• Transactions
• Allocation of savings
• Pricing and allocation of risk

Question 2

Can households and businesses be borrowers and lenders at different times?

Answer 2

Yes

Question 3

Whats the difference between direct and indirect finance?

Answer 3

Direct - Bank that accepts deposits and lends to small companies

Question 4

What are two types of bonds?

Answer 4

Government (public)

Corporate (private)

Question 5

What are securities?

Answer 5

Bonds and equities

Question 6

What are characteristics of buy side?

Answer 6

• Purchase the securities
• Long term institutional investors
• Pension funds
• Asset managers

Question 7

What are characteristics of sell side?

Answer 7

• Sell securities on behalf of issuers
• Sell to long term investors
• Known as “underwriters” (bonds)
• Deal with initial primary offering (IPO)

Question 8

What is another word for “secondary offerings”?

Answer 8

Seasoned offerings

Question 9

What are ways government bonds are issued?

Answer 9

• Through auctions to investment banks

- Allocations to leading investment banks (Euro area)

Question 10

How are emerging market bonds issued?

Answer 10

Underwritten by investment banks or a “syndicate” of the bank

Question 11

Why is there tension between buy side and sell side?

Answer 11

Because buy side wants lowest price to pay and sell side wants highest price to sell for