lecture 1 Flashcards
what are financial markets
markets where funds transferred
typically stock exchange
what role does financial markets play in the economy
provide info
allow for transfer of consumption timings
allocation of risk
what is direct financing
borrow fund directly from lender
assets to the buyer buy liabilities to the seller
what is indirect financing
use of financial intermediaries to help with financing such as car loans
what do financial intermediaries do
they bring together borrowers and lenders
what to economies of scale allow for
efficiencies in gathering info
transaction costs
what are the types of intermediaries
- Building soc
- Retail banking
- Investment banking
- Finance houses
- Pension funds
- Insurance comp
- Investment pool vehicles
what are the type of investment pool vehicles
unit trusts
investment trusts
exchange traded funds (ETFS)
hedge funds
what are hedge funds
attempt to generate positive investment based on skill
only for the wealthy
very risks as based on market
what are exchange traded funds (ETFS)
set up as a company issuing shares
used to buy a collection of shares
open ended but trade like stock
what are investment trusts
tradable
invest in range of assets
price set by market
priced at premium sold at discount discount NAV puzzle
what are unit trusts
open ended funs units are brough and sold by fund managers
no limit
not traded on open market
priced at net asset value
divided into active and passive trackers
what is the net asset value formula
market value - liabilities / number of units
what is fintech
the application of tech in financial markets
what has fintech done
helped with disintermediation
allowed individuals to interact directly
what are the categories of financial markets
primary
secondary
exchanges
over the counter
debt markets
share equity markets
foreign exchange markets
derivative markets
money markets
capital markets
what are primary markets
- New issues of a security sold to initial buyers
- Not well known to the public
Financial institutions which assist are investment banks
what are secondary markets
- Securities previously issued can be resold
- LSE
- NYSE
- Specialists
○ Brokers - agents of investors that match buyers and sellers don not hold portfolios
Dealers - link buyers and sellers, hold a portfolio of securities
what are exchange markets
Organised markets that provide physical meeting places and communication
what is over the counter markets
Market with no central location
what are capital markets
include longer term and riskier securities
what are money markets
short term
what is common to money markets
- Large denominations
- Low default risk
- Short maturities
what are certificates of deposit
- Bank pays interest and principal at maturity
- Cannot be withdrawn
Sold on second markets
- Cannot be withdrawn
treasury bills
- Used by government
- Traded
Investors buy the bills at discount from FV and earnings are the difference
- Traded
what are commercial bill
Same as treasury bill but for companies
what are banker acceptance
- Firm issues doc that states bank will make payments in the future
- Like a bill but the bank promises to pay
- Less risky
Smaller rates
what are bills of exchange
a written order binding one party to pay a fixed sum of money
what are sale and repurchase agreement
Securities are sold for cash with the promise to buy those back in future at higher price
The interest is the difference
what is LIBOR
London Interbank Offer Rate
the premier short-term interest rate quoted in the European money market
Vulnerable to manipulation 2012
what is SONIA
Sterling Overnight Index Average (managed by BoE average of previous day transactions)-SOFR equivalent US
what is the stock exchange
Organised markets where government and industry can raise capital
Investors can buy and sell securities
how many countries are officially recognised
140
what is the LSE
Started in 18th century
No physical trading floor anymore
Both primary and secondary market
what is the main market of the LSE
- 25% of shares in public hands.
Loss of some privacy and autonomy, e.g. greater disclosure of directors’ remuneration.
what does AIM stand for
Alternative investment market
what is the price at which the dealer buys on the exchange
the bid price
what is the price at which a dealer sells called
the ask price
what is the spread (exchange market)
difference between the bid and ask price
what is the tick size (exchanges)
minimum price movement allowed 0.1p in the UK
what is a limit order
buy or sell orders that are to be executed at a specified prices
what are market orders
buy or sell orders that are to be executed immediately at current market prices
what are clearing houses
a counterparty- eliminates default risk
complete the transaction - settlement
To ensure the buyer has funds for the trade investors set margin accounts with their brokers
