Markets Flashcards
Describe the major differences between ordinary shares and preference shares.
What - Ordinary shares - Preference shares
Dividends - Variable - Fixed
Dividends - Not cumulative - May be cumulative
Voting rights - Yes - Mostly no
Ranking for dividends - Last - First
Claim to assets in liquidation - Last - Second last
What is the main difference between the bond markets and share markets?
The bond market is a decentralised network of market participants, while the stock market is highly centralised consisting of only a few exchanges.
Most secondary trading of corporate bonds occurs through dealers, although a few are traded on the ASX.
The secondary market for corporate bonds is thin compared with the share markets. This means secondary market trades of corporate bonds are relatively infrequent.
As a result, the bid-ask spread quoted by dealers of corporate bonds is quite high compared with those of other more marketable securities such as shares.
Explain the difference between a put and a call.
A call is an option to buy at the strike price; a put is an option to sell at the strike price.
What is the difference between an American and European option?
An American option is an option that can be exercised at any time until the option expires whereas, European options can only be exercised at expiry.
Discuss the globalisation of financial markets.
A complex interaction of historical, political and economic factors drive the globalisation of financial markets. Historical and political factors include the demise of the Bretton Woods system of fixed exchange rates and the fail of the Soviet Union.
Economic factors include the disruption caused by widely fluctuating oil prices, the large trade deficits experienced by the United States, Japan’s rise of financial pre-eminence during the 1980s and its weakness in the 1990s and early 2000s, the global economic expansion that began in late 1982, the Asian economic crisis in the late 1990s and the adoption of the euro in 1999.
Long-term economic and technological factors that have promoted the internationalisation of financial markets include the global trend towards financial deregulation, standardisation of business practices and process, ongoing integration of international product and service markets, and breakthroughs in telecommunications and computer technology.
Explain what Commonwealth government securities (CGS) and semi-government securities (semis) are, where they are issued and their relative liquidity.
CGS are Treasury bonds and T-notes, issued by the Australian Office of Financial Management. Semis are bonds issued by state and territory borrowing authorities backed by their respective governments. The amount of CGS on issue has been declining from 1996. However, this trend is now reversed as the federal government is expected to run budgetary deficits for the next several years and needs to fund these by issuing new CGS.
The Commonwealth government has decided to support the Treasury bond futures market by maintaining current levels of securities in the market. Treasury bonds are important instruments because they carry no default risk and are useful in managing interest rate risk across the economy. Semis are often issued offshore and can be exchanged for domestic issues Although they are not as liquid as CGS domestically, the ability to exchange them raises their liquidity offshore and makes them more attractive to investors. Also dissimilarly to CGS, semis are issued through dealer panels and not an open tender.
