Financial Management Environment (4) Flashcards
What are the benefits of financial intermediaries?
Maturity transformation
Aggregation of funds
Pooling losses
What is meant by maturity transformation?
Borrowing money on shorter timeframes than they lend out
An example of a maturity transformation?
Bank can make a ten-year loan while still allowing its depositors to take money out whenever they want
What is an aggregation of funds?
Can aggregate similar savings deposited by savers and lend on to borrowers in larger amounts
What is meant by a risk transformation?
Risky investments are therefore effectively changed into low risk investments for individual investors
What is meant by pooling losses?
Suffered through default by borrowers or capital losses are effectively pooled and borne as costs by the intermediary
What is meant by disintemediation?
A decline in traditional deposit and lending relationship between banks and their customers and an increase in direct relationships between ultimate suppliers and users of financing
What is meant by a contributing factor to the development of disintermediation (securitisation)?
The ability of companies to borrow by issuing debt securities
What is another definition of securitisation?
Converting existing previously untradeable (illiquid) assets into marketable securities
What is meant by money market?
Short-term finance
What is meany by capital market/
Medium to long-term finance
What is meant by primary markets?
Where companies issue new securities issue new securities to investors to raise new funding
What is meant by secondary markets?
Where investors by and sell from/to each other
What are interest-bearing instruments?
Instruments which pay interest and investor receives face value + interest of maturity
What are discount instruments?
Do not pay interest. They are issued and traded at a discount to face value and they are redeemed attheir par value at maturity
