Lecture 1- capital matkets

Question 1

What are the three main services that the capital markets and financial system provides?

Answer 1

a) Transactions (payments, foreign exchange
securities trading and settlement), this is the operational side of capital markets
(b) Allocation of savings to their best possible uses in
investment and other spending;
(c) The pricing, allocation and management of risk.

Question 2

What is the main distinguishing factor for how people become lenders and savers?

Answer 2

life cycle
very young: more likely to borrow
middle age: more likely to save
old: more likely to spend

Question 3

What is the difference between indirect finance and direct finance?

Answer 3

ndirect Finance: through a financial intermediary such as a bank or insurance company
EXAMPLE: A bank that accepts savings deposits and lends to small companies

Direct Finance: No intermediary is involved
EXAMPLE: “dragon’s den” where angel investors interview small businesses and invest in them directly (buying a share of their equity)

Question 4

What has been a big change in the financial industry since 1980?

Answer 4

Growth in Finanical intermediaries: bank and insurance companies
F.intermediaries issue a LARGE poportion of corporate bonds –> borrow a lot of short term debt (M.market)

Question 5

How has investing become global with the influence of Governments and other instruments?

Answer 5

Net investment: emerging Co’s like China being gas Exporters –> high CA surplus
–> invest surplus overseas –> citizens & gov purchase F.assets (bonds and equities)

Large gross investment: Investors and banks from Developed Co’s hold many F.assets in OTHER developed Co’s

Direct investment:
no Financial market –> 2 companies owning subsideries and facilities in other co’s, and wealthy inds investing in property

Question 6

who makes up the buy-side of the market?

Answer 6

Long-term insitutional investors:
–> pension funds, insurance companies and weath funds
Asset Managers:

Question 7

who makes up the sell-side of the market?

Answer 7

Investment Banks:
–> Goldman Sacs want to get as good price as possible for their clientel (they act as underwriters and book builders

Equities being issues are IPO’s (intial primary offering)
–> company putting shares on a market

the government can also be on the sell side via equity and bonds

Question 8

How are government bonds issued

Answer 8

Auction and investment banks: US, UK and Germans government do this through BOND DEALERS: who bid these in auctions and sell the bonds to buy side investors

Allocation of Bonds:
–> this is seen in Euro area governments, where they issue bond to leading Investment banks

Question 9

How are corporate Bonds issued?

Answer 9

Corporate bonds are debt securities issued by corporations and sold to investors.

Underwritten:
–> merging market governments are normally underwritten by an investment bank or a “syndicate” of investment banks.

Question 10

what is underwriting?

Answer 10

process through which an individual or institution takes on financial risk for a fee

• ->Underwriting involves conducting research and assessing the degree of risk of each applicant or entity before assuming that risk.
• ->Underwriting ensures that an IPO company will raise the amount of capital needed and provides the underwriters with a premium or profit for their services.

Question 11

what is the tension between sell-side and Buy-side?

Answer 11

Sell-side: they want HIGHEST PRICE for securities as possible
Buy-side: they want to pay the LOWEST price possible

–> is the returns high enough/ low enough to COMPENSATE FOR RISKS OF THE SECURITY

Question 12

What is the primary market for issuing securities (IPOs, bond underwriting)?

Answer 12

IPOs, Bond Underwriting also called the new issue market (NIM)

Question 13

What is the secondary markets for trading securities?

Answer 13

Aftermarket and follow on public offering is the financial market

Question 14

What is the tertiary market for trading risk?

Answer 14

Derivatives

Question 15

What is the distinction between the primary and secondary market?

Answer 15

the initial offering of stock takes place in the primary market –> investment banks handle these transactions (VERY LARGE INSTITUTIONAL BUYERS) –> price is set by the bank –> banks find buyers

These refer to all transaction which occurs after the initial offering –> NYSE and NASDAQ –> price is set by demand and supply

Question 16

Why is the distinction between secondary and tertiary markets not so clear?

Answer 16

• Buyers and sellers are the same, either buying (taking long position) or selling (taking short position) as they adjust portfolios and hedge risk
• There are ‘brokers’ who act as their agents, looking for ‘best execution

Question 17

What is MIFID II and what did it do for research bundling?

Answer 17

resaerch Bundling

• -> sell-side brokers were allowed to bundle research analysis and their trading fees
• ->dealers in OTC, bundled research with thier bid ask spreads. (but an equity market concern)

Question 18

What are the two ways funds pay for research

Answer 18

Revenues or pass the cost onto thier clients

–> they usually pay i directly using thier revenues

Question 19

what are the consequences of MIFI2?

Answer 19

Using the understanding of a 1st year economist, it would lead to over-consumption of bundles e.g. having unlimited alcohol as a holiday bundle

Question 20

what is the role of asset managers

Answer 20

–> provide portfolio management services to long term investors