Chapter 3 Flashcards
What are two types of intermediaries ?
1) Agency-intermediaries which don’t have financial assets on their balance sheets
2) Principle- intermediaries who have very large holdings of financial assets on their balance sheets There are two types:
Unleveraged (financed purely by capital)
Leveraged (financed by a high proportion of debt capital)
What is an example of an agency intermediary ?
Stockbroker
What is best efforts basis?
An investment bank arranging a financing for a company but acting purely as the organiser of a new share or bond issue
What is a systemically important financial institution?
A firm that’s large enough that if it collapsed, it would have an effect on other firms
What is a principle?
A person or company who trades for their own account rather than on customer account.
Those who deal with principles rather than agents must be aware that they deal on the basis of what?
‘Buyer beware’
That they may not obtain best execution
That they may more often than not be on the wrong side of a trade as evidenced by subsequent price movements
What is the insurance business similar to?
Other financial services businesses in that one side of the balance sheet (assets) is simply a fund while the other is simply underwritten risks
A new issue of shares involves a contract between a company and investors which is evidenced by what?
The prospectus of the issue
Funding liquidity and market liquidity are what types?
Primary market and secondary market liquidity
Price discovery can only be achieved by what markets?
A multilateral market
A bilateral market
A primary market
What can investment banks provide trading services through?
Agency basis transactions or capital facilitated actions
Who are clients the clients of an investment bank?
Issuers
Investors
In-house proprietary traders and in-house funds
What is economic rent?
The extra return received above the normal profit level that would be observed in a perfectly competitive market?
What are the ways in which an investment bank an generate income?
Fees
Capital Gains
Spreads
What does commercial banking do?
Deposit taking
Financing through credit provision
Money transmission services
What does investment banking do?
Raising finance through markets and on behalf of companies
Provide liquidity in the securities issues it arranges
Undertakes financial asset structuring
Provides risk management services
What is asset managent?
Creating portfolios of assets for clients to help them achieve their risk management objectives at minimum cost
What is wealth management?
Advising individuals on how to structure their wealth holdings to achieve a desired risk profile
What is insurance?
The provision of risk management services involving pure risks of loss but also financial risk services
What are the two main types of trading centres ?
- System companies (provide means for traders to meet and execute a trade without any capital provision by the trading centre organiser)
- Financial intermediaries ( broker /dealer provide a trading centre facility by acting in the role of a capital intermediary using their own proprietary capital)
What are the three types of data providers?
Trading centre
Data consolidators
Pricing and index providers
What do financial markets enable?
The transfer of liquidity in one direction and a risk/return opportunity in the other
What is the key function of a secondary market?
Discover fair price
What are two ways in which a client trade execution can be achieved?
Capital facilitated
Agency
