Financial markets and treasury function

Question 1

Financial markets act as a link between

Answer 1

those with surplus cash and those who need to raise cash.

Question 2

The market where new funds are raised is a…

Answer 2

primary market

Question 3

The market where existing securities are bought and sold is a …

Answer 3

Secondary market

Question 4

Capital and money markets are both

Answer 4

Financial markets

Question 5

What is a security?

Answer 5

An investment instrument which is traded on a market.

Question 6

Bonds, shares, and some money market instruments are all examples of

Answer 6

securities.

Question 7

What is a Capital market?

Answer 7

Long term capital is raise, and securities are traded,

Question 8

Stock markets and bond markets are examples of…

Answer 8

Capital markets

Question 9

Where ordinary shares and preference shares in a company are bought and sold…

Answer 9

Stock market (eg london stock exchange)

Question 10

A bond market is not a physical market, but is created by…

Answer 10

banks.

Question 11

What are money markets?

Answer 11

Where short term finance is raised

Question 12

This market makes it possible to hedge currency and interest rate risk

Answer 12

Money market

Question 13

What are the 3 types of money market instrument?

Answer 13

1. Interest bearing
2. discount instruments
3. derivate products

Question 14

What is an interest bearing instrument?

Answer 14

These pay interest to the investor and are redeemed at a date in the future. eg Certificate of deposit

Question 15

What is a certificate of deposit?

Answer 15

A certificate of recognition which an investor an negotiate or sell, on, or before the maturity date. (interest bearing instrument)

Question 16

What are discount intstruments?

Answer 16

Issued at a discount and redeemed at nominal value - interest is implied.

Question 17

Give 3 types of discount instruments?

Answer 17

1. Treasury bills
2. Commercial papers (bills)
3. Repos

Question 18

Short term debt issued by the government (91 day) - issued at a discount to redemption value.

Answer 18

Treasury bill

Question 19

Short term debt (normally unsecured) issued by a company at a discount to the redemption value. Must mature within 270 days.

Answer 19

Commercial paper (bill)

Question 20

The sale and repurchase of agreements. Borrow sells securities to raise cash and buys them back at a higher price.

Answer 20

Repos. The higher price is the repo rate.

Question 21

What is a derivative?

Answer 21

A financial instrument whose value is derived from the behaviour of the underlying asset on a future date.

Question 22

What is financial intermediation?

Answer 22

Potential borrowers are brought together with potential lenders by a third party (intermediary)

Question 23

Give 6 examples of intermediaries?

Answer 23

1. banks
2. investment trusts
3. Pension funds
4. Building societies
5. debt factoring companies
6. Leasing companies

Question 24

Intermediaries reduce this risk of a single loss, resulting in a total loss to the investor. This is…

Answer 24

risk reduction

Question 25

Pooling small deposits to make a large loan or advance to a company by an intermediary is known as…

Answer 25

Aggregation

Question 26

Savers who may only wish to save short term are matched with borrows who wish to borrow long term - this is…

Answer 26

Maturity transformation. Savers are replaced every few years.

Question 27

What is treasury management?

Answer 27

Activities that manage the liquidity of the business.

Question 28

What are the 6 activities of treasury management?

Answer 28

• Short term cash management
• Currency risk management
• Interest rate risk management
• Raising long term debt or equity finance
• Dividend policy decisions
• Investment appraisal evaluations.

Question 29

Give 3 benefits of a centralised treasury management?

Answer 29

1. Cash pooling - surplus cash of each company remitted to centre for efficient management
2. Avoid duplication of skills - highly trained specialised
3. Currency risk can be managed more effectively - appreciation of exposure to the whole group.

Question 30

What are the benefits of a decentralised treasury management?

Answer 30

Local teams better understand local conditions

Great responsibility for loan teams to manage cash effectively …motivation to manage well.