Chapter 18 - Financial markets Flashcards
What do financial markets act as?
Act as a link between those with surplus cash and those who need to raise cash in order to invest
What is a Primary Market?
The market where new funds are raised
What is a Secondary Market?
The market where existing securities are bought and sold
What kind of markets do financial markets include?
Capital markets and money markets
What is a security?
An investment instrument traded on a market.
What sort of capital is traded on Capital Markets?
- Long term capital
- Securities
Give two examples of a Capital market?
- Stock market
- Bond market
Is the bond market a physical market?
No
What is the bond market?
A market created between banks to buy and sell bonds
What is raised on money markets?
Where short term funds are raised.
What are the three types of money market instruments?
- Interest bearing instruments
- Discount instruments
- Derivative products
What are Interest bearing instruments?
These pay interest to the investor and are redeemed on a particular date in the future.
Give an example of an interest bearing instrument.
- Certificates of Deposit (CD’s)
- Repos
Describe Certificates of Deposit (CD’s) (four things)
- 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
Give two examples of Discount instruments.
- Treasury bills
- Commercial paper (or commercial bills)
Describe Treasury bills
- 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.
Describe Commercial paper (or commercial bills)
- 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
Describe Repos
- 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).
Describe Derivative products
- 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
Give three examples of derivative contracts
- Futures
- Options
- Swaps
What is financial intermediation?
The process whereby potential borrowers are brought together with potential lenders by a third party, the intermediary.
Give six examples of intermediaries
✓ Banks ✓ Investment trusts ✓ Pension funds ✓ Building societies ✓ Debt factoring companies ✓ Leasing companies
What is the term describing the difficulties for SME’s when raising finance because of their lack of business history?
Funding gap
What are three main advantages of money markets?
- Short term trade finance
- Short term liquidity
- Allows managing of exposure to foreign interest risk
What are the four main roles of intermediaries?
- Risk reduction
- Aggregation
- Maturity transformation
- Financial intermediation
Explain risk reduction
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.
Explain aggregation
By pooling many small deposits, financial intermediaries are able to make much larger advances than would be possible for most individuals.
Explain maturity transformation
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.
Explain Financial intermediation
Financial intermediaries bring together lenders and borrowers through a process known as financial intermediation.
What is another name for Eurobonds?
International bonds
What are the three main roles of the treasury?
- Short term management of resources
- Long term maximisation of shareholder wealth
- Risk management
