Financial Management Environment (1) Flashcards
What is financial intermediation?
Taking money from those who deposit and those who want to borrow
What is aggregation?
Lots of money deposited from many people, allow them to lend big amounts to companies
What is maturity transformation?
Individuals deposit money for relatively short periods, but bank can transform this into longer-term loans to companies
What is diversification of risk?
Individuals afraid of lending money to one particular company. Banks lend individuals money to many places therefore reduces risk
How do companies raise money?
Through issuing shares
Purpose of the stock exchange?
A way of selling shares to shareholders. If I don’t want shares, sell them to someone else through stock exchange
Who fixes the share price in stock exchange?
The dealer
Why do share prices change?
Dealer buys shares and sells them to people who want to buy. Dealer must match the two concepts for the best possible results
A successful dealer?
Raises and lowers prices for the best possible supply and demand
Bull market?
When share price is increasing
Bear market?
When share price is decreasing
What is financial market efficiency?
How do they think the company is doing
If companies shares are doing well?
Pay high price
If companies shares aren’t doing well?
Pay low price
Efficient market hypothesis?
How realistic share prices are depends on how much info is available to investors
Strong-form efficiency?
Shareholders have all information available to company and have the perfect share price
Weak-form efficiency?
Only have what the share price is in the past. No clue how it will do in the future
Semi-strong efficiency?
Share prices are fixed by shareholders but ivnestors have all information publicly available
Examples of semi-strong?
Stock markets
A high interest charged by a bank?
I am perceived as more risky
The more years I borrow money (interest rates)?
The interest rates will increase
THe more I borrow interest rates (amount)
The more there is, the more interest charged
Y axis and X axis on the yield curves?
Y axis: Yield
X axis: Years to maturity
The shape of the yield curve?
Determines the likely movements in the interest rate
Assumption in the yield curve?
The more years to maturity, the more the yield increases
Shape of yield curve theories
Expectations theory
Liquidity preference theory
Segmentation theory
What is expectations theory?
If interest rates expected to increase, curve curves upward and vice versa. Curves goes flat if prices are the same
What is liquidations preference theory?
Yields will rise when investing for a longer period
What is segmentation theory?
Different investors are interest in different segments of the yield curve. Curve’s results are based on these reactions
