Financial markets and treasury function Flashcards
Financial markets act as a link between
those with surplus cash and those who need to raise cash.
The market where new funds are raised is a…
primary market
The market where existing securities are bought and sold is a …
Secondary market
Capital and money markets are both
Financial markets
What is a security?
An investment instrument which is traded on a market.
Bonds, shares, and some money market instruments are all examples of
securities.
What is a Capital market?
Long term capital is raise, and securities are traded,
Stock markets and bond markets are examples of…
Capital markets
Where ordinary shares and preference shares in a company are bought and sold…
Stock market (eg london stock exchange)
A bond market is not a physical market, but is created by…
banks.
What are money markets?
Where short term finance is raised
This market makes it possible to hedge currency and interest rate risk
Money market
What are the 3 types of money market instrument?
- Interest bearing
- discount instruments
- derivate products
What is an interest bearing instrument?
These pay interest to the investor and are redeemed at a date in the future. eg Certificate of deposit
What is a certificate of deposit?
A certificate of recognition which an investor an negotiate or sell, on, or before the maturity date. (interest bearing instrument)
What are discount intstruments?
Issued at a discount and redeemed at nominal value - interest is implied.
Give 3 types of discount instruments?
- Treasury bills
- Commercial papers (bills)
- Repos
Short term debt issued by the government (91 day) - issued at a discount to redemption value.
Treasury bill
Short term debt (normally unsecured) issued by a company at a discount to the redemption value. Must mature within 270 days.
Commercial paper (bill)
The sale and repurchase of agreements. Borrow sells securities to raise cash and buys them back at a higher price.
Repos. The higher price is the repo rate.
What is a derivative?
A financial instrument whose value is derived from the behaviour of the underlying asset on a future date.
What is financial intermediation?
Potential borrowers are brought together with potential lenders by a third party (intermediary)
Give 6 examples of intermediaries?
- banks
- investment trusts
- Pension funds
- Building societies
- debt factoring companies
- Leasing companies
Intermediaries reduce this risk of a single loss, resulting in a total loss to the investor. This is…
risk reduction
Pooling small deposits to make a large loan or advance to a company by an intermediary is known as…
Aggregation
Savers who may only wish to save short term are matched with borrows who wish to borrow long term - this is…
Maturity transformation. Savers are replaced every few years.
What is treasury management?
Activities that manage the liquidity of the business.
What are the 6 activities of treasury management?
- Short term cash management
- Currency risk management
- Interest rate risk management
- Raising long term debt or equity finance
- Dividend policy decisions
- Investment appraisal evaluations.
Give 3 benefits of a centralised treasury management?
- Cash pooling - surplus cash of each company remitted to centre for efficient management
- Avoid duplication of skills - highly trained specialised
- Currency risk can be managed more effectively - appreciation of exposure to the whole group.
What are the benefits of a decentralised treasury management?
Local teams better understand local conditions
Great responsibility for loan teams to manage cash effectively …motivation to manage well.
