Chapter 1 - Introduction to financial markets (section 1.6+)

Question 1

What are the rules when it comes to price-sensitive infomation

Answer 1

• If price-sensitive infomation is released to analysts or jounalists then the company should take neccessary steps to make sure the whole market has access to that infomation.
• Rules must comply with insider dealing regulations of the Criminal Justice Act

Question 2

How often should a public company hold an AGM meeting

Answer 2

• Under compliance act states that an AGM meeting should be held every 6 months
• The interval between AGM meetings should not over 15 months

Question 3

How does AGM and General meetings differ

Answer 3

• AGM’s are meant to be given 21 days notice
• General meetings are meant to be given 14 days written notice and companies are permitted to communicate with shareholders electronically
• AGM meeting at least once a year but a general meeting can be called whenever directors see fit or when 5% or more shareholders request it

Question 4

What are the main types of resolution considered at general meetings

Answer 4

• Ordinary resolution requires majoirty f those voting to be passed

A special resolution is required before an constituonal change can be made and requires 75% vote in favour to be passed

• Popular voting methods in general meetings include: show of hands or a poll

Question 5

Must all members attend an AGM

Answer 5

• No, they can appoint a proxy who they see as fit
• General proxy - Member appoints a person to vote as they think fit
• Special proxy - Appointing a person to vote for or against a particular resolution.

Question 6

Why do investors invest overseas

Answer 6

• Potential diversifcation benefits
• The risks to consider is the FX risk

Question 7

Where does trading on european equities take place

Answer 7

• Most trading of equities on european secruties takes place on a electric order matching system
• In the US, NYSE is largest equity market - helps to maintain an ‘orderly market’ and the primary processing order is the UTP

Question 8

Why are emerging markets seen as risky to investors

Answer 8

• Quality of market regulation, corporate governance and transparency is often below compared to developed market. - Harder to price and sell secruties
• Political risks

Question 9

What is an example of a eurobond

Answer 9

• A bond issued by a russian cooperation in London, demominated in US Dollars
• Usually fixed rate and unsecrured with a matruity rate of 7 years
• Their ‘bearer’ status allows the eurobond to be held annomously but usually held by private indivduals

Question 10

How does government bond trading happen in other countries

Answer 10

• It happens OTC
• Corporate bonds are usually traded and listed through central clearing depoistary systems associated with local exchanges

Question 11

What are eurobonds regulated under

Answer 11

• International Capital Market Association (ICMA)
• Syndicate companies and their investors are considered the primary market for eurobonds, once they are sold to general investors then this means that the go in the secondary market.

Question 12

What two systems are in place for investors ti settle Eurbond transactions

Answer 12

• Euroclear and Clearstream are two systems which bonds can be brought from
• Trades must be confimred T+1 and settled T+2

Question 13

safekeepingof…

What is the difference between a local custodian and a global custodian

Answer 13

• A local custodian is responsible for the safekeeping of secruties in a national market
• A global custodian supervises the safekeeping of secruties in local depositaries

Question 14

What is the principal agent problem (agency problem)

Answer 14

• When the person owning something has different piorties to a specialist in servcing that thing.
• This is where ownership of a company is dispersed through shares then it is not possible for the owner to control the company
• The owner is usally the pricniple and shareholders are agents
• Agency problem occurs because managers and owners have different interests - owners want to maxiise value of the firm and managers want to maximise thier own interests e.g. salary

Question 15

Explain agency problem in developed and less developed countries

Answer 15

In developing countries where investor protection regulation is not as developed then there may be instinces of self dealing and embezzelement of funds

• In developed countries a more common form of agency problem is allocation of owner funds used for managers personal consumption

Question 16

What is the solution the agency problem

Answer 16

1) Aligning incentives of managers to match the owners, by compnesating them in the form of shares - Means managers are incentivised to make better decisions for the firm that will lead to an increase in the share price

2) Managers can be monitored by the board of directors - Any undeperforming manager will be removed by board of directors.

Question 17

What can shareholders do reduce the agency problem

Answer 17

• Can introduce external pressure of selling shares if the manager runs the company badly - leads to potetntial takeover target and poor management will lose their jobs.

Question 18

How does the agency problem affect the investment industry

Answer 18

• The investor (principle) may appoint a broker (the agent) to obtain the best possible price in a trade but they may act in their own interest.
• They do this when upon recieving a large order they place an order themselves to take advantage of the rise in price anicipated by the large order of the client (front running)

Question 19

What is the problem when professionals pursue their own interests over the client

Answer 19

• Can lead to a distrust in the products and services provided - may potentially lead to savers not to lend as much which reduces funds for companies that need to borrow

Question 20

What is disintermediation

Answer 20

• Removal of middleman from decision making process