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CIMA shortened > Chapter 4 > Flashcards

Chapter 4 Flashcards

1
Q

What is a financial system?

A

Where Households, firms and governments can borrow/invest funds

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2
Q

What are financial intermediaries

A

They connect those who want to invest with those who want to borrow

net savers and net borrowers (created by lack of synch can be connected here)

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3
Q

What is direct/indirect finance?

A

Direct = no intermediary
Indirect = intermediary

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4
Q

Aside from intermediaries, where else can you borrow from?

A

You can borrow/invest directly in financial markets
-> short term markets (money markets)
-> long term markets (capital markets)

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5
Q

What do capital markets comprise of?

A

bond and equity markets

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6
Q

What is syncronisation?

A

To maintain a stable financial position, there must be a syncronisation (balance or match) between payments and receipts

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7
Q

When does lack of syncronisation happen?

A

-When payments or recipts aren’t consistent
-Can happen in short, medium and long term

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8
Q

Synchronisation of payments: Businesses

A

Outgoings: salaries, purchase inventories and non-current assets

Ingoings: Sales of good, rental income

Business will have to make payments before cash is recieved before sale/use of their assets

-ensure length of credit = life of assets they are funding

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9
Q

Short term finance sources

A

OC ABC

  1. O Bank overdraft
  2. C Credit card
  3. A Credit Agreement
  4. B Bills of exchange - IOU from one business to another
  5. C Commercial papers - unsecured promissory notes (IOUs) issues by companies
    -have a life of less than 270 days
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10
Q

KEY TERM: Commercial papers

A

Unsecured promissory notes issued by companies that generally have a life of less than 270 days

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11
Q

Long term finance sources

A

Share capital/equity - selling shares
Long term loans/bonds -secured on the assets of the business
Venture capital - finance risky ventures, require high return
Mezzanine finance - initially a loan, converted into shares in the company if loan is not paid back in time

SLUM SLVM

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12
Q

Syncronisation in Gov

A

Many things to spend on
Income mainly through taxes
If expenditure /= income, budget surplus and budget deficit

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13
Q

Eg’s of financial intermediarys

A

Clearing banks/investment banks/building societies
insurance companies/pension funds
Investment trusts/stock exchanges/VC’s

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14
Q

What are the benefits of using financial intermediaries?

A

RAMM
Risk management - shielded from bad debt risk of other borrowers and lenders
Aggregations - intermediary can take small amounts from investors and lend in larger packages
Maturity transformation - match lenders and borrowers with correct timescales
Matching borrowers and lenders

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15
Q

What is a financial instrument?

A

used to describe any funding medium

cash instrument - value directly determined by market
derivative instrument - value determined by underlying performance

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16
Q

Financial instrument: what is a credit agreement

A

obtain G + S now and may repayments over a period of time

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17
Q

Financial instruments: what is a mortage?

A

loan secured over a property - repayments are made

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18
Q

Financial instruments: what is a bill of exchange?

A

IOU
-lender draws up a bill for an amount and a repayment date (typically 90 days) - borrower sign

active market - sells for slightly less than face value

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19
Q

Financial instruments: what is a certificate of deposit?

A

essentially a savings account w a fixed term and fixed intrest rate
insured up to 90000
some can be traded

20
Q

FInancial instruments: Equities

A

finance raised through the issue of shares

21
Q

What is an ordinary share?

A

-holders are owners of the business
-ordinary equity cant be sold back to company (irredeemable)
-can be traded

22
Q

What are preference shares?

A

-some characteristics of debt and equity

Cumulative - if a dividend not payid one year - it will be added to dividends paid in later years
Redeemable - may have rights to be bought back at a later date
Participating - right to a share in any excess profits over a certian amount

23
Q

Financial instruments what is a bond

A

-long term debt instrument issued by gov or companies
-written legal agreement

UK issued bonds will pay owner interest, based on bonds coupon rate every 6 months

debenture = secured bonds - there is collatoral
loan stock = unsecured bonds

24
Q

What is a redeemable/iredeemable bond?

A

Redeem = fixed repayment date
irredeemable = perpetual

25
Q

3 types of bonds to know

A

eurobonds in $ or £ in another country - intrest annual and coupon rate = bill rate
government bonds - GILTS
corporate bonds - high risk - better yield

26
Q

What is mezzanine finance?

A

for high risk lending situations
unsecured - high interest rate
initally a loan - can be converted into shares if unpaid

27
Q

what is gearing

A

a company that uses a large proportion of debt finance relative to equity finance

28
Q

Net present values

A

all future inflows minus the PV of outflows

If NPY +ve PV inflows > PV outflows - project undertaken
If NPV -ve project should not be undertaken

discount rate = cost of capital = return req by investors

29
Q

IRR

A

Discount rate that gives NPV = O
-tells us the actual % return that the project generates
as the discount rate increases, NPV reduces

IRR>cost of capital - accept
IRR< cost of capital - reject

30
Q

What is a yield? what are the 4 types

A

the return to the investor
running yield
coupon rate
gross redemption rate
dividend yield

31
Q

What is the running yield?

A

=interest yield
annual interest/market price

annual interest is based on the coupon rate

32
Q

What is the coupon rate

A

=bill rate/nominal yield
interest rate offered on a bond

% value of the nominal value of the bond that is paid as interest each period

33
Q

What is gross redemption yield?

A

yield to maturity

overall av return to investor

taking into accountt interest returns and capital gain or loss on redemption of the bond

no calc

34
Q

What is a dividend yield

A

annual dividend/market price (share price)
current % dividend return in relation to the existing share price

35
Q

What is TSR

A

total shareholder return

overall return to an investor in any given period on equities

(dividend in the year + change in share price)/share price at start of year = N %

36
Q

What is a nominal rate?

A

nominal annual interest rate 24% - nominal monthly interest rate of %
nominal monthly interest rate 2% 24% annual rate

37
Q

what is a bond? simple

A

a loan
a company buys a bond - company pay interest and then pays back eventually

38
Q

why is equity the highest risk

A

-dividends might not be paid (directors determind this)
-you might not be able to sell the shares

39
Q

What is liquidity?

A

lack of liquidity - when investors have cash tied up for a long time
-liquidity preference is when they are compensated for this lack of liquidity

40
Q

what is the yield curve?

A

The yield curve represents the relationship between interest rates and term to maturity (for financial instruments

41
Q

Longer term to maturity offer higher yields, why?

A

-low liquidity - compensated
-additional risk of long term investment - uncertainty about future of economy/company
-uncertainty about inflation

42
Q

what is the real interest rate

A

1+
real interest rate = money rate (nominal rate)/inflation rate

43
Q

Influence of central bank on interest bank

A

to set short term interest rates
achieved in UK by
open market operations - the buying and selling of short term instruments (treasuring bills and short term bonds) in primary market
-direct impact on yields of other financial securities

44
Q

how does central bank spoost spending in an economy that is lacking in consumer confidence

A

quantitative easing
-by purchasing assets of the government or private sector
-reducing interest rates by pushing up asset pirices and lowering yeilds so that spending is encouraged again

45
Q

what is secured?

A

secured against collatoral

CIMA shortened (15 decks)

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