Financial Management Environment (4)

Question 1

What is a primary market activity?

Answer 1

The selling of new securities to raise new funds

Question 2

What is a secondary market activity?

Answer 2

The trading of existing securities

Question 3

What is principal role of money markets?

Answer 3

Transfer money from parties with surplus funds to parties with a deficit

Determine short-term interest rates

Question 4

What is interest-bearing instruments?

Answer 4

Debt issued at nominal value, paying “coupon” interest on this nominal value

Question 5

What are discount instruments?

Answer 5

Debt issued at a discount to nominal value paying no interest (i.e. zero coupon) but redeemed at nominal value

Question 6

What are derivative instruments?

Answer 6

Financial institutions provide their clients with customised (OTC) instruments for hedging currency risk or interest rate risk

Question 7

Examples of interest-bearing instruments?

Answer 7

Ceritifcate of deposit
Repurchase agreements
Municpal notes

Question 8

Examples of discount instruments?

Answer 8

Bill of exchange
Comemrcial paper
Banker’s acceptance
Treasury bills

Question 9

What is a ceritificate of deposit?

Answer 9

A savings certificate issued by a commercial bank entitling the holder to receive interest

Question 10

What is repurchase agreements?

Answer 10

Short-term loans arranged by selling securities to an investor with an agreement to repurchase them at a fixed price on a fixed date

Question 11

What is municpal notes?

Answer 11

Short-term debt issued by cities in anticipation of future tax receipts or other revenues

Question 12

What is a bill of exchange?

Answer 12

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

Question 13

What is commercial paper?

Answer 13

Unsecured, but high-quality, corporate debt with a fixed maturity of one to 270 days

Question 14

What is banker’s acceptance?

Answer 14

A short-term debt issued by a company that is guaranteed by a commercial bank

Question 15

What are treasury bills?

Answer 15

Short-term debt obligations of a national government that are issued to mature in three to 12 month

Question 16

What are derivative products?

Answer 16

A financial instrument whose value or price depends on an underlying asset

Question 17

What can large companies do instead of borrowing from a bank?

Answer 17

A large company can issue bonds and borrow directly from investors, with banks arranging the transaction

Question 18

Why is bull and bears so important?

Answer 18

Ensures that there is always a ready market in all shares

Reduces fluctuations in the market

Question 19

What is an efficient market?

Answer 19

One in which the market price of all securities traded on it reflects all the available information

Question 20

What is a perfect market?

Answer 20

One which responds immediately to the information made available to it.

Question 21

What is allocative efficiency?

Answer 21

Does the market attract funds to the best companies?

Question 22

What is operational efficiency?

Answer 22

Does the market have low transaction costs and a convenient trading platform

Question 23

What is informational efficiency?

Answer 23

All relevant information available to all investors at low cost

Question 24

What is pricing efficiency?

Answer 24

Do share prices quickly and accurately reflect all known information about the company

Question 25

Stock market efficiency and effects on financial managers?

Answer 25

Timing of new issues
Project evaluation
Creative accounting
Mergers and takeovers

Question 26

What are corporate bonds?

Answer 26

(Also called “loan notes”) are often used to raise funding for large-scale projects

Question 27

What is nominal value in corporate bond?

Answer 27

The price at which the bonds are initially issued

Question 28

What is coupon interest rate paid to bond owner?

Answer 28

Usually a fixed percentage of the nominal value

Question 29

What is the redemption date?

Answer 29

When the nominal value of the bond must be repaid to the bond holder