Financial Assets Flashcards
What is Finance?
- Transfer funds from surplus spending units to deficit spending units (from those who have funds to those who need funds)
- Reallocation of scarce resources from non-productive to productive uses
Example of Non-Productive Uses
Keeping cash in tins instead of depositing in the banks.
What is a Credit Cycle?
- Put cash in banks
- Bank can issue loans and funds for people who need it (e.g. startups that need funding)
- Business grow
- Employees wages grow
- Employees increase their consumption
- Goes back to point 1
* In simple terms, for more info, visit https://www.investopedia.com/terms/c/credit-cycle.asp
What are Financial Assets?
- Any possession that has value in exchange.
- > Able to be resold.
- > Able to provide cash flows
What are some examples of Tangible Assets?
Value of assets is based on physical properties.
- Land
- Buildings
- Machinery
- Vehicles
What are some examples of Intangible Assets?
Legal claims to future benefits.
- Stocks
- Bonds
- Derivative Instruments (Value is derived from the underlying financial assets, they themselves has no value)
What are some examples of future benefits for intangible assets?
- Stocks: Dividends/ Whatever is left of the company if it goes bankrupt
- Bonds: Coupons + Par Value of the Coupon
- Derivative Instruments: Options and Futures
Roles of Financial Assets?
- Helps in transfer of funds from surplus spending units to deficit spending units (non-productive to productive uses)
- Efficient pooling of funds (e.g. issue bonds and stocks to increase funds)
- Efficient distribution of ownership (e.g. issuing stocks)
- Management of risk
Types of Financial Assets (Debt/liabilities)
Fixed payments (periodically)
- Bank Loans
- Government bonds (T-bill; T-bonds)
- Corporate bonds (Coupons, par value)
Types of Financial Assets (Equity)
Payments are based on earnings (Not fixed)
e.g. Company have no obligation to give dividends based on their retained earnings
- Common Stock
- Preferred Stock
Money or near money (Properties of Financial Assets)
How easy the financial asset can convert into money.
Near money (quasi-money): Can be converted easily + quickly to cash.
- Saving deposits
- Fixed deposits
- Negotiable Certificate of Deposit (NCD)
- Debit cards
- Cashless payments
What is M1 and M2 under MAS definition?
M1 = Currency in active circulation M2 = M1 + near money
What is a Negotiable Certificate of Deposit?
A certificate of deposit (CD) with a minimum face value of $100,000, though NCDs are typically $1 million or more.
An NCD is short term, with maturities ranging from two weeks to one year. Interest is paid, usually either twice a year or at maturity, or the instrument is purchased at a discount to its face value. Interest rates are negotiable, and yield from an NCD is dependent on money market conditions.
- Does not mean terms & conditions are negotiable
- Only ownership can be tradable/sellable/transferrable
LOW RISK BUT: Generally considered riskier as compared to T-bills, because the chances of a bank failing are greater than that of insurrection in the U.S. government ranks. As such, i/r for NCDs > i/r for Treasury bills.
Divisibility (Properties of Financial Assets)
Minimum size for liquidation or exchange for money.
What are infinitely divisible assets?
Deposits. (up to 2 dp)
$2.147947384……THEREFORE, it is (ALMOST) infinitely divisible.
Why do investors buy lots of shares?
- Easier
- Cheaper
Therefore, more people buy and sell due to the convenience –> Increase liquidity.
Why did the lots of shares reduce from 1,000 to 100 in Jan 2015 in Singapore?
- Increase participation to trade
- Increase trading volume/liquidity
- Increase efficiency in financial markets
What is the minimum size of liquidation (to buy and sell) for T-bills and bonds?
$1,000
Reversibility (Properties of Financial Assets)
Round trip cost. (Transactional cost)
Cost of getting in and out.
Increases price of asset
- Reflects liquidity
e. g. bid-ask spread; commission or brokerage fee; stamp fee/duty (pay taxes to the government to allow trading); loadings
What is a bid-ask spread?
Difference between the price where the market (or market maker) is willing to buy and sell.
e.g. Foreign exchange market - money changer
How to tell the risk from a bid-ask spread?
High risk: Wider spread - Bracket surrounding the true price increases + returns are higher (allow the investor to protect themselves from the high risk)
Low risk: Narrower spread
- If the risk is too high, people stop making the market
- Their risk tolerance is maxed out (They are only willing to endure so much)
What are Loadings?
A sales charge to an investor when buying
or
commission charged when redeeming shares in a mutual fund.
For example, if you invested $1,000 into a 5% load mutual fund, you would actually be investing only $950, with the remaining $50 going to the sales intermediary, such as a broker, financial planner, or investment advisor, for his time and expertise in selecting an appropriate fund for the investor [COMMISSION].
There are different types of load an investor may encounter:
- Front-end loads (Class A shares), is a single charge paid by the investor when they purchase shares of the fund (buy into the fund).
- Back-end load (Class B shares) charge a one-time fee paid when you redeem or sell, your mutual fund shares (when you liquidate).
- Level load funds (Class C shares), are yearly charges and will be a fixed percentage taken from the fund’s assets.
Liquidity (Properties of Financial Assets)
How fast the assets liquidate/sell
What affects liquidity?
- Number of ready buyers and sellers
Large group = high liquidity
