Market Organization and Structure Flashcards
What are the six main purposes of the financial system?
- Save money for the future
- Borrow money for current use
- Raise equity capital
- Manage risks
- Exchange assets for immediate and future deliveries
- Trade on information
The financial system facilitates savings through investment vehicles, such as bank deposits, notes, stocks, and mutual funds etc.
The main functions of the financial system are to facilitate the following three goals:
- Achievement of the purposes for which people use the financial system
- Discovery of the rates of return that equate aggregate savings with aggregate borrowings
- Allocation of capital to the best uses
What are information-motivated traders?
Traders who trade to profit from information that they believe allows them to predict future prices. Unlike pure investors, they expect to earn a return on their information in addition to the normal return expected for bearing risk through time.
What is the equilibrium interest rate?
The equilibrium interest rate is the rate at which the supply of loanable funds equals the demand for those funds, ensuring a balance in financial markets. It is the only interest rate that would exist if all securities were equally risky, had equal terms, and were equally liquid.
What are primary capital markets?
The markets in which companies and governments raise capital or funds
When is an economy allocationally efficient?
When their financial systems allocate capital to those uses that are most productive.
What is the difference between money markets and capital markets?
Money markets trade debt instruments maturing in one year or less.
Capital markets trade instruments of longer duration, such as bonds and equities.
What belongs to traditional investments markets?
All publicly traded debts and equities and shares in pooled investment vehicles that hold publicly traded debts and/or equities.
What are examples of alternative investments?
Hedge funds, private equities, commodities, real estate securities and real estate properties, securitized debts, operating leases, machinery, collectibles, precious gems
What are swaps?
Swaps are financial contracts in which two parties exchange cash flows or liabilities, typically to manage risk. Common types include interest rate swaps, currency swaps, and commodity swaps.
What are the three broad classes of securities?
Fixed income, equities, and shares in pooled investment vehicles
What are fixed-income instruments?
Financial instruments that contractually include predetermined payment schedules that usually include interest and principal payments. They generally are promises to repay borrowed money.
What is the difference between notes and bonds?
Fixed-income securities with shorter maturities (<10 years) are called “notes” and those with longer maturities are called “bonds”.
How are convertible bonds priced in two scenarios of high and low stock price?
With a high stock price and large probability of converting, price like a stock.
With a low stock price and low probability of converting, price like a bond.
Governments can issue bills. Banks can issue certificates of deposit. Corporations can issue commercial paper. They usually mature within a year.
What are repos?
Repurchase agreements are short-term lending instruments. The term can be as short as overnight. A borrower seeking funds will sell an instrument - typically a high-quality bond - to a lender with an agreement to repurchase it later at a slightly higher price based on an agreed-upon interest rate.
What are warrants?
Securities issued by a corporation that allow the warrant holders to buy a security issued by that corporation, if they so desire, usually at any time before the warrants expire or, if not, upon expiration.
What is the difference between an open-end and a closed-end fund?
Open-end funds issue new shares and redeem existing shares on demand, usually on a daily basis. Price is based on NAV.
Closed-end funds issue shares in primary market offerings that the fund or its investment bankers arrange, and once issued, investors cannot sell their shares of the fund back to the fund.
What are the primary and secondary reserve currencies?
Primary are US Dollar and Euro
Secondary are British Pound, Japanese Yen and Swiss Franc
What are commodities?
Precious metals, energy products, industrial metals, agricultural products and carbon credits. The producers and processors of industrial metals and agricultural products are the primary users of the spot commodity markets because they generally are best able to take and make delivery and to store physical products.
What are real assets?
They include tangible properties such as real estate, airplanes, machinery or lumber stands. These assets normally are held by operating companies. However, many institutional investment managers have been adding real assets to their portfolios as direct investments and indirect investments.
Why are most real assets unsuitable for investment portfolios?
Because they are illiquid, heterogeneous and require substantial costs to manage them.
What is a contract?
An agreement among traders to do something in the future. Contracts include forward, futures, swap, option and insurance contracts. The value of most contracts depend on the value of an underlying asset.
