Financial Claims

Question 1

What are Financial Claims?

Answer 1

Claim to the ownership of a series of future cash flows

Who holds the claims?

• Banks
• UK Gov
• Company Stocks/Shares

Question 2

Risk and Expected Return

Answer 2

Uncertainty of future cash flows that affects the value of the financial claim

Expected return is a weighted average (probability of each return) of all possible returns

Question 3

Measuring expected return

Answer 3

Measure variance-find deviation-square deviations-weight each deviation by its probability-add up

STD=Square root r

Trade off risk and return; investor requires compensation for each additional unit of risk he bears

Question 4

Real Value Certainty

Answer 4

Nominal Value:stated value
Real Value:nominal value adjusted for inflation
Inflation:general upward trend of price movement over a period of time (CRI,RPI)

Real Value is the value of a financial claim denominated in the base-year money

Fisher equation

Real value certainty measures the extent to which the real value of a financial asset is affected by inflation

CASH—————PROPERTY

Question 5

Liquidity

Answer 5

How easily and quickly financial assets can be converted into cash without loss

Liquid=lower returns than illiquid assets. Investors do not like illiquidity

Question 6

Measuring the liquidity of listed shares

Answer 6

Listed vs Unlisted
Basic and direct measure - bid ask spread
Derived or indirect measure
- Trading volume
- Amihud measure
- Turnover adjusted zero-trading volume days

Question 7

Term to Maturity

Answer 7

Time remaining before a financial claim expires

• debt usually 1-30yrs
• shares: indefinite

Question 8

Currency denomination

Answer 8

All claims denominated in certain currency

Due to Internationalisation

Euro currency - transparent to everyone (NOT THE EURO)

Question 9

Debt

Answer 9

Amount borrowed by one party from another
Cash flows of debt
- interest
- principal

Question 10

Equity

Answer 10

Equity is the claim to a company's ownership 
- common equity 
- preferred shares 
Cash flows of equity 
- dividend 
- selling price 
- residual liquidation