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Financial Management ACCA > Chapter 18 - Financial markets > Flashcards

Chapter 18 - Financial markets Flashcards

1
Q

What do financial markets act as?

A

Act as a link between those with surplus cash and those who need to raise cash in order to invest

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2
Q

What is a Primary Market?

A

The market where new funds are raised

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3
Q

What is a Secondary Market?

A

The market where existing securities are bought and sold

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4
Q

What kind of markets do financial markets include?

A

Capital markets and money markets

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5
Q

What is a security?

A

An investment instrument traded on a market.

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6
Q

What sort of capital is traded on Capital Markets?

A
  • Long term capital

- Securities

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7
Q

Give two examples of a Capital market?

A
  • Stock market

- Bond market

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8
Q

Is the bond market a physical market?

A

No

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9
Q

What is the bond market?

A

A market created between banks to buy and sell bonds

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10
Q

What is raised on money markets?

A

Where short term funds are raised.

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11
Q

What are the three types of money market instruments?

A
  • Interest bearing instruments
  • Discount instruments
  • Derivative products
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12
Q

What are Interest bearing instruments?

A

These pay interest to the investor and are redeemed on a particular date in the future.

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13
Q

Give an example of an interest bearing instrument.

A
  • Certificates of Deposit (CD’s)

- Repos

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14
Q

Describe Certificates of Deposit (CD’s) (four things)

A
  • money is deposited by an investor with a bank for a period of time
  • investor is given a certificate in recognition
  • The investor can ‘negotiate’ or sell the certificate on before the maturity date
  • Very liquid
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15
Q

Give two examples of Discount instruments.

A
  • Treasury bills

- Commercial paper (or commercial bills)

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16
Q

Describe Treasury bills

A
  • Short term debt issued by the UK government (91 days maturity).
  • Issued at a discount to the redemption value
  • No interest paid but investor gets a return on the difference between the issue and redemption values.
17
Q

Describe Commercial paper (or commercial bills)

A
  • Short term debt (normally unsecured) issued by a company
  • Issued at a discount to the redemption value.
  • No interest paid but investor gets a return on the difference between the issue and redemption values.
  • Must mature within 270 days.
  • Can only be issued by the most credit worthy companies
18
Q

Describe Repos

A
  • sale and repurchase agreements
  • A ‘borrower’ agrees to sell securities and buy them back at a later date for a higher price
  • The difference between the prices is the interest rate (or ‘repo’ rate).
19
Q

Describe Derivative products

A
  • a financial instrument whose value is derived from the behavior of an underlying asset.
  • gives the holder the right or obligation to buy or sell the underlying asset on a future date
20
Q

Give three examples of derivative contracts

A
  • Futures
  • Options
  • Swaps
21
Q

What is financial intermediation?

A

The process whereby potential borrowers are brought together with potential lenders by a third party, the intermediary.

22
Q

Give six examples of intermediaries

A 
✓ Banks
✓ Investment trusts
✓ Pension funds
✓ Building societies
✓ Debt factoring companies
✓ Leasing companies
23
Q

What is the term describing the difficulties for SME’s when raising finance because of their lack of business history?

A

Funding gap

24
Q

What are three main advantages of money markets?

A
  • Short term trade finance
  • Short term liquidity
  • Allows managing of exposure to foreign interest risk
25
Q

What are the four main roles of intermediaries?

A
  • Risk reduction
  • Aggregation
  • Maturity transformation
  • Financial intermediation
26
Q

Explain risk reduction

A

By lending to a wide variety of individuals and businesses financial intermediaries reduce the risk of a single default resulting in total loss of assets.

27
Q

Explain aggregation

A

By pooling many small deposits, financial intermediaries are able to make much larger advances than would be possible for most individuals.

28
Q

Explain maturity transformation

A

Most borrowers wish to borrow in the long term whilst most savers are unwilling to lock up their money for the long term. Financial intermediaries, by developing a floating pool of deposits, are able to satisfy both the needs of lenders and borrowers.

29
Q

Explain Financial intermediation

A

Financial intermediaries bring together lenders and borrowers through a process known as financial intermediation.

30
Q

What is another name for Eurobonds?

A

International bonds

31
Q

What are the three main roles of the treasury?

A
  • Short term management of resources
  • Long term maximisation of shareholder wealth
  • Risk management

Financial Management ACCA (26 decks)

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