Lecture 1

Question 1

What is meant by a financial market

Answer 1

Specialised market where financial assets(securities) can be traded

Question 2

What is meant by a financial asset

Answer 2

It’s any intangible possession/assets that represent a claim to future cash flows.

Question 3

Examples of financial asset

Answer 3

Commercial bank loans and government bonds and stocks

Question 4

Price of financial asset / equation

Question 5

What are risk of a financial asset

Answer 5

• a large loss
  1) default/credit risk ( borrower is bankrupt )
  2)inflation risk/purchasing power
  3)Forgein exchange risk ( comes from exchange rate eg pounds and dollars

Question 6

What is meant by the role of financial markets 1( transfer funds and risk)

Answer 6

1) aid the price discovery process: price fo fa depends on demand(firms ) and supply (i) s interactions of buyers and sellers

Question 7

What is meant by the role of financial markets 2

Answer 7

Provide liquidity :how easily the financial assets can be sold and bought to cash

Question 8

What is meant by the role of financial markets 3

Answer 8

Reduce the costs of transacting minimising
- search costs
Explicit :money spent on advertising
Implicit : time spent finding

Question 9

What are the main reasons put forward for financial markets regulation

Answer 9

• prevent issuers from defrauding inverstors by concealing relevant info/rules specified
  -promote completion and fairness
  -promote stability
  -restrict cut items of forgein corneces
  -control level of economic activity

Question 10

What is a market

Answer 10

Any environments where buyers and sellers meet to exchange items of value

Question 11

What are tangible and intangible assets

Answer 11

Tangible are physical Possesions whole intangible lack physical form and include financial assets like security’s

Question 12

Roes of issuers and investors in financial markets

Answer 12

• issuer is the entity that borrows by promising future cash payments and the investor is the lender or owner of asset

Question 13

What determines the claim value of a FA

Answer 13

Claim value may be fixed amount (debt instruments) or varying (equity instruments)

Question 14

What is the price of financial asset

Answer 14

Determined by the present value of expected cash flow, even if cash flow is uncertain
KEY COPONETS
- expected cash flow: The forecasted return the asset will generate
- present value: the current worth of the expected future cash flow

Question 15

Formula for expected rate of return

Answer 15

Expected rate of return formula:
E
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r
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t
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f

r
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t
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=
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−
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×
100
%
E[rate of return]=
P
t
​

P
t+1
​
−P
t
​

​
×100%

Question 16

Role of financial markets

Answer 16

• price discovery ; pocess where the buyers and sellers’ different opinions about an asset’s value come together to decide its current price, based on supply and demand
• provide liquidity:

Question 17

Liquidity explanation

Answer 17

Liquidity in financial terms works similarly. If a financial asset is liquid, it means you can buy or sell it very quickly without affecting its price too much, like buying lemonade from the always-open stall. Shares of big companies like Apple or Google are examples of liquid assets because there are always lots of people willing to buy or sell them.

An illiquid asset is harder to sell quickly without potentially having to reduce the price to make it more attractive. A house is an example of an illiquid asset; it can take weeks or months to sell, and you might have to lower the price if you need to sell it quickly.

In finance, liquidity is important because it gives you flexibility and confidence that you can convert assets into cash or other assets whenever you need to.