Financial Management Environment (4) Flashcards
What is a primary market activity?
The selling of new securities to raise new funds
What is a secondary market activity?
The trading of existing securities
What is principal role of money markets?
Transfer money from parties with surplus funds to parties with a deficit
Determine short-term interest rates
What is interest-bearing instruments?
Debt issued at nominal value, paying “coupon” interest on this nominal value
What are discount instruments?
Debt issued at a discount to nominal value paying no interest (i.e. zero coupon) but redeemed at nominal value
What are derivative instruments?
Financial institutions provide their clients with customised (OTC) instruments for hedging currency risk or interest rate risk
Examples of interest-bearing instruments?
Ceritifcate of deposit
Repurchase agreements
Municpal notes
Examples of discount instruments?
Bill of exchange
Comemrcial paper
Banker’s acceptance
Treasury bills
What is a ceritificate of deposit?
A savings certificate issued by a commercial bank entitling the holder to receive interest
What is repurchase agreements?
Short-term loans arranged by selling securities to an investor with an agreement to repurchase them at a fixed price on a fixed date
What is municpal notes?
Short-term debt issued by cities in anticipation of future tax receipts or other revenues
What is a bill of exchange?
A short-term financial instrument consisting of a written order addressed by the seller of goods to the buyer requiring the latter to pay a certain sum of money on demand or at a future time
What is commercial paper?
Unsecured, but high-quality, corporate debt with a fixed maturity of one to 270 days
What is banker’s acceptance?
A short-term debt issued by a company that is guaranteed by a commercial bank
What are treasury bills?
Short-term debt obligations of a national government that are issued to mature in three to 12 month
What are derivative products?
A financial instrument whose value or price depends on an underlying asset
What can large companies do instead of borrowing from a bank?
A large company can issue bonds and borrow directly from investors, with banks arranging the transaction
Why is bull and bears so important?
Ensures that there is always a ready market in all shares
Reduces fluctuations in the market
What is an efficient market?
One in which the market price of all securities traded on it reflects all the available information
What is a perfect market?
One which responds immediately to the information made available to it.
What is allocative efficiency?
Does the market attract funds to the best companies?
What is operational efficiency?
Does the market have low transaction costs and a convenient trading platform
What is informational efficiency?
All relevant information available to all investors at low cost
What is pricing efficiency?
Do share prices quickly and accurately reflect all known information about the company
Stock market efficiency and effects on financial managers?
Timing of new issues
Project evaluation
Creative accounting
Mergers and takeovers
What are corporate bonds?
(Also called “loan notes”) are often used to raise funding for large-scale projects
What is nominal value in corporate bond?
The price at which the bonds are initially issued
What is coupon interest rate paid to bond owner?
Usually a fixed percentage of the nominal value
What is the redemption date?
When the nominal value of the bond must be repaid to the bond holder
