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Finance > Lecture 2 > Flashcards

Lecture 2 Flashcards

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1
Q

What is direct financing?

A

Finance arranged through issuing securities to investors in the financial markets in order to raise funds for deficit units

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2
Q

What are the two kinds of financial institutions that raise funds for deficit units?

A

Merchant and investment banks
Merchant banks: Prepare documentation, market the issue, earn fees for these services
Fund managers- purchase securities and in turn charge a fee for their services

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3
Q

Who aids suplus units in investing funds?

A

Fund managers

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4
Q

What are the four mismatches between surplus and deficit units?

A

1) Amount of funds
2) Length of contract
3) Risk exposure
4) Returns

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5
Q

What is the spread of funds for direct?

A

The cost of funds for deficit units and the returns to surplus units

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6
Q

What is the spread for direct financing represented by?

A

For surplus units: The rate of return- fund manager fee
For deficit units: The rate of return + fund manage fee

The difference between the overall rate of return and fund manager fee represents the spread

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7
Q

What is the spread for indirect financing (i.e. depositing funds in ADIs)?

A

The difference between the interest rate paid to surplus units and the interest rate charged to deficit units

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8
Q

What is the difference between the primary and secondary markets? Who regulates each market?

A

Primary market- for the initial issuing of securities (where the issuer will receive the money) ASIC regulates the primary market
Secondary market- the subsequent trading of securities:
Securities exchange: ASX
Over the counter: Australian Financial Markets Association

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9
Q

Under what kind of contract do merchant banks issue securities?

A

Under the best efforts contract

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10
Q

What are the requirements under the best efforts contract

A

1) Make sure issue is complying with the law
2) Aid in preparing prospectus
3) Arrange an auditor
4) Marketing for bonds/ securities issues
HOWEVER, they are not required to guarantee that all securities are sold

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11
Q

Under what kind of contract will merchant banks guarantee that all securities on offer will be sold?

A

Standby underwriting contract

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12
Q

What are the roles of rating agencies? Who are they paid by and for what purpose

A

Provide an expert opinion about the expected performance of securities and financial institutions. Paid by the issuer ad are required for securities to be issued- will determine rating

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13
Q

Who are the main issuers of ratings in Australia

A

Standards and Poor’s, Moody’s and Fitch Ratings

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14
Q

How are securities cleared?

A

Through the clearinghouse- which is Austraclear in Australia

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15
Q

What is the role of the clearing house (Austraclear)

A

1) Maintain the security register
2) Clear trades that change ownership
3) Feed payment instructions in RTGS

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16
Q

What are the role of secondary markets?

A

1) A trading planform that enables trading
2) Trading rules and procedures to promote efficient and fair trading
3) Settlement arrangements to organise payments

17
Q

How are secondary markets organised? What is the trading platform for equity?

A

Either:

a) A securities exchange (the ASX)
b) An over-the-counter (OTC) basis by an association of market dealers Australian Financial Markets Association

The securities exchange is the trading platform for equity

18
Q

What types of securities do exchange markets organise?

A

The share market and also some derivatives

19
Q

Who arranges trading the the exchange market? What are they responsible for?

A

Brokers:

  • Act as agents on behalf of clients
  • Aid the sale and purchase of securities on behalf of their client
  • Responsible for each trade- will ensure clients actually pay or have shares to actually sell - Earn a commission
20
Q

What kind of a market is the exchange market?

A

Order driven market- orders taken form traders to by or sell

21
Q

What does a trading order specify?

A
  • Buying or selling
  • The security
  • The quality
  • The price
22
Q

What are the two types of prices?

A

Limit price: Either maximum or minimum buying or selling price
At-market price: which is at the best available price (therefore will not sit in the BUY or SELL part of commsec)

23
Q

What are over-the counter markets? What types of securities do they typically include? Who operates in the market?

A

Money, bond and FX markets and some of the derivative markets. Dealers operate in the market

24
Q

What do dealers do?

A
  • Act as their own principal
  • Trade with each other and with wholesale clients (large banks and institutions)
  • Hold inventory of securities which they provide and offer
  • Earn their income as a spread- the difference between the buy and sold price
25
Q

When will a spread be a ‘round trip’ transaction?

A

When dealers buy at a low price and sell for a higher price

26
Q

What are the two types of markets dealers operate in?

A

Dealer client and inter dealer markets

27
Q

What is the ‘bid’ and ‘Offer’
What is the market spread
What is the dealer spread?

A 
Bid= the amount willing to buy for  
Offer= the amount willing to sell for
28
Q

How are funds in over the counter markets settled?

A

Through the back-office clearinghouse of each dealer and broker involved in the trade

29
Q

What are the market rules included in the ASX?

A

Trading hours, pricing practices, trading protocols, transaction sizes

30
Q

How do secondary markets assist primary markets?

A

a) Provide investors with liquidity

b) Price discovery function

31
Q

What are the three measures of liquidity? How does this benefit primary markets?

A

1) Daily turnover
2) Bid-ask spread
3) Price resilience
This gives primary markets to re-sell securities, hence increasing confidence within the market

32
Q

What does price discovery involve? How does it aid primary markets?

A

Markets generate fail prices, interest rates and exchange rtes they regard as ‘fair’ when they are a result of trading by informed traders- typically within efficient markets.
Aid primary markets as they can:
- monitor the value of investments
- Informs potential issuers of securities of their expected proceeds, or what price is reasonable for new securities

33
Q

What does the efficient market hypothesis state?

A

Security markets efficiently use information to generate ‘fair’ prices that move randomly

34
Q

What are the three levels of informational efficiency?

A

Weak- form: efficiently use past price data- current prices reflect all past prices (useless studying them)
Semi- strong: efficiently uses all published information (prices reflect all publicly available information)
Strong form- prices reflect all available information include insider information (price also reflect information in the external enviornment and internal environment- insider trading)

35
Q

How should prices move in an efficient market?

A

Take a random work

36
Q

What are price bubbles?

A

Prices exceed fair value and are followed by a share correction

37
Q

What are bear and bull markets?

A 
Bull= long periods of generally rising prices 
Bear= Refers to periods where prices are generally falling

Finance (10 decks)

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