Financial Markets

Question 1

What are Two Types of Players in the Financial Markets?

Answer 1

Buy-Side and Sell-Side.

Question 2

How do Buy-Side Firms Make Money?

Answer 2

• Management fees.
• Performance fees.

Question 3

How do Sell-Side Firms Make Money?

Answer 3

• Advisory fees.
• Commissions on trades.

Question 4

How do Insurance Funds Make Money?

A Buy-Side Firm.

Answer 4

• Underwriting income (insurance premiums).
• Investment income (returns on invested capital).

Question 5

How do Pension Funds Make Money?

A Buy-Side Firm.

Answer 5

• Performance fees.
• Management fees.
• Administrative fees.
• Transaction fees (e.g. early withdrawls)

Question 6

What Activities do Investment Banks engage in?

Answer 6

Buy-Side Activities:

• Asset Management.

Sell-Side Activities:

• M&A Advisory.
• Market Making.
• IPO Underwriting.
• Sales and Trading.
• Market Intelligence.

Question 7

What is the Role of an Investment Bank as an M&A Advisor?

Answer 7

On the Buy Side:

• Search for and evaluate the prospects of suitable Targets.
• Develop bespoke bidding startegies.
• Perform Financial DD on the Target.

On the Sell Side:

• Market the Target to prospective Buyers.
• Administer the bidding process.
• Perform Financial DD on the Buyer.

Question 8

What is the Role of an Investment Bank as an IPO Underwriter?

Answer 8

Advisory Services:

• Advise the Issuer on timing, valuation, and compliance.

Underwriting Proper:

• Committing to purchase the shares from the Issuer before selling them on to the public.

Marketing and Distribution:

• Preparing the Prospectus, running the Roadshow, and allocating shares bewteen investors.

Aftermarket Support:

• Stabalise the share price by providing liquidity.

Question 9

What are the Advantages and Disadvantages of Debt as a source of finance?

Answer 9

Advantages:

• Tax efficient.
• Finite in time.
• Retention of ownership.
• Improved credit and reputation.
• Lower cost of capital (if already creditworthy).

Disdvantages:

• Interest.
• Risk of insolvency.
• Collateral requirements.
• Strict repayment obligations.
• Strict financial or commercial covenants.

Question 10

What are the Advantages and Disadvantages of Equity as a source of finance?

Answer 10

Advantages:

• No insolvency risk.
• No interest obligations.
• No repayment obligations.
• No collateral requirements.
• Improved credit and reputation.
• Access to non-financial assets (expertise, networks, etc.)

Disdvantages:

• Infinite in time.
• Ownership dilution.
• Dividend expectations.
• Higher pressure to perform.
• Greater potential for conflict.

Question 11

What is the Optimal Capital Structure for any given Firm?

Answer 11

Whichever achieves the lowest Weighted Average Cost of Capital (WACC).

Question 12

For a Private Company, what are the Advantages and Disadvantages of an IPO?

Answer 12

Advantages:

• Increased prestige.
• Access to a deeper capital pool.
• Access to a wider investor pool.
• Increased liquidity for its shares.
• Easy exit opportunity for current investors.

Disadvantages:

• Lengthy and costly.
• Ownership dilution.
• Higher pressure to perform.
• Increased regulatory obligations.

Question 13

What is Impact Investing?

Answer 13

A return-conscious strategy that prioritises prosocial investment outcomes.