Financial Markets And Institutions Flashcards
What is the main purpose of financial markets?
To promote savings and investment by providing mechanisms for lenders and borrowers to meet their financial requirements.
What are financial intermediaries?
Institutions that channel savings of individuals, businesses, and governments into loans or investments.
What is the role of the Bank of England (BOE)?
Central bank of the UK established in 1694, authorized to issue banknotes and protect financial system stability.
What does the Prudential Regulation Authority (PRA) do?
Responsible for the prudential regulation and supervision of banks, building societies, credit unions, insurers, and major investment firms.
What is macroprudential regulation?
Regulation that focuses on the stability of the financial system as a whole rather than individual firms.
True or False: The Financial Conduct Authority (FCA) regulates all financial services firms in the UK.
False. The FCA works alongside the PRA and regulates firms not supervised by the PRA, like asset managers.
List the functions of financial institutions.
- Re-packaging finance
- Risk reduction
- Liquidity transformation
- Cost reduction and advice
What are deposit-taking institutions (DTIs)?
Institutions such as banks and building societies that accept deposits and provide loans.
What distinguishes non-deposit-taking institutions (Non-DTIs) from DTIs?
Non-DTIs engage in lending activities but do not accept deposits.
What is the primary market?
The financial market where securities are initially issued and the issuer is directly involved in the transaction.
What is the difference between primary and secondary markets?
Primary markets involve the initial issuance of securities, while secondary markets involve the trading of pre-owned securities.
What do money markets deal with?
Highly liquid securities with maturities of one year or less.
Fill in the blank: The _______ is a key benchmark interest rate indicating borrowing costs between banks.
London Interbank Offered Rate (LIBOR)
What is the role of the Financial Policy Committee (FPC)?
Identifies and monitors systemic risks to the UK’s financial system and supports the government’s economic policy.
What are the main domestic financial markets?
- The Equity Market
- The Bond Market
- The Money Markets
- The Derivatives Markets
What is the London Stock Exchange (LSE)?
A major equity market where companies can be listed and trade their shares.
What is the Alternative Investment Market (AIM)?
A second-tier market of the LSE for smaller, younger companies seeking stock market listings.
What does the FTSE 100 represent?
An index of the largest 100 qualifying UK companies by full market value.
What are key performance statistics commonly reported for shares?
- Dividend yield
- Price:earnings ratio
What is liquidity transformation in financial institutions?
The process of bringing together short-term lenders and long-term borrowers.
What is the main function of insurance companies?
To protect clients against specified risks in return for payment of an annual premium.
What type of securities are traded in the money market?
Short-term debt instruments such as Treasury bills and commercial paper.
What is the significance of the Secured Overnight Financing Rate (SOFR)?
A benchmark interest rate to replace LIBOR for dollar-denominated derivatives and loans.
What is the primary market activity when a company goes public?
The company issues ordinary shares for the first time to raise finance.
What is a private placement in financial markets?
The sale of a new security directly to an investor or group of investors.
True or False: The secondary market raises finance for the company.
False. It involves trading of existing securities and does not raise finance for the company.
What is the role of financial institutions in risk reduction?
Investing sums into large, well-diversified investment portfolios on behalf of individuals and companies.
What are the main money market instruments?
- Treasury Bills
- Certificates of Deposit (CDs)
What are key market indicators that financial managers and investors analyze?
Performance of shares against sector and competitors
Includes dividend yield and price:earnings ratio
What is the formula for market capitalization?
Market capitalization = share price * number of shares
Total market value of all outstanding shares
Define gross yield.
Gross yield = dividend per share / share price
What does the price:earnings ratio indicate?
The market’s willingness to pay for a stock based on past or future earnings
What does a high P/E ratio usually indicate?
Investor confidence in future profit growth
What is dividend cover?
Dividend cover = earnings per share / dividend per share
What do corporate debentures and ‘gilts’ represent?
Types of bonds issued by companies and governments
What is a gilt?
A UK Government liability issued by HM Treasury
What are the two types of gilts?
- Conventional gilts
- Index-linked gilts
What is the difference between conventional and index-linked gilts?
Index-linked gilts adjust payments based on the UK Retail Prices Index
What is the formula for interest yield?
Interest Yield = coupon payment / market price
Fill in the blank: A derivative instrument is an asset whose performance is based on the behavior of the value of an _______.
underlying asset
List some common underlyings for derivative instruments.
- Commodities
- Shares
- Bonds
- Share indices
- Currencies
- Interest rates
What is a forward contract?
An agreement to exchange at an agreed future date at a price agreed now
How do forwards differ from futures?
Forwards are not standardized and traded OTC, while futures are standardized and traded on exchanges
What is an option in financial terms?
A contract giving the right, but not the obligation, to buy or sell an asset at a specified price
What is a swap?
An exchange of cash payment obligations between two parties
What is the traditional method of trading in exchanges?
Open outcry system with physical meetings of traders
What is e-trading?
Using electronic systems for traders to enter and match trades
What are the two types of markets mentioned in the financial system?
- Over-the-counter (OTC) market
- Exchange-traded market
What is the risk associated with forward contracts?
Risk of default by the counterparty
What is the cash flow profile in bond investments?
Measurement of return based on coupon payment and market price
