Module 14 Flashcards
What are the three areas of the financial sector?
Banking
Insurance
Asset management
Two types of banks?
Commercial bank
Investment banks
What is a commercial bank?
Collects deposits from individuals and companies and lends money to them when they wish to borrow
Intermediary between borrowers and lenders
Customers who deposit money in the bank are?
The banks creditors
Effectively borrowing their money
Customers to whom the bank lends money are?
The banks debtors
Customers owe the bank
What is financial intermediation?
The process of pooling funds from different sources and testing them to provide loans and make investments
Investment banking includes activities such as
Providing advice to corporate customers who want to raise finance
Managing corporate mergers and acquisitions
Buying and selling shares and ones on behalf of corporate and private as well as for bank itself
What is a building society?
Similar to commercial bank
Must take a substantial proportion of its funds from members who are private individuals
What is a credit union?
Accepts funds from those who share a common bond
Advanced to meet personal borrowing needs
Mutual, members are the owners
What is NS&I?
National savings and investment
Takes deposit from public to fund some of governments borrowing needs
What are mutual organisations?
Owned by its members - the organisations savers, investors and borrowers
Members nearly always have one vote each
Don’t received dividends
Return takes the form of interest
Most building societies start as MO, most BS converted to LC
What is securitisation?
Assets which are illiquid are pooled together and transforms them into a more liquid security
- commonly mortgages (mortgage backed security)
- investment bank will buy mortgages from a commercial bank, packager them together and sell the new security
What happened with mortgage backed security?
Become so valuable to commercial banks they started to sell more without proper credit checks
Riskier mortgages classed as SUB PRIME
when customers defaulted they became worthless- collapse in value of MBSc and devaluation of balance sheet
What can insurance provide cover for?
Loss of an asset (house, car)
Creation of a liability (accidental damage etc)
Pure financial losses (legal expense, credit insurance etc)
What is insurance?
Risk pooling and transfer mechanism through which buyer pays a premium to mitigate one or more risks
Buyer compensated should risk materialise
What does an underwriter do?
Assessed risks and quotes premium based on how likely and how much
Once premium paid, insurance company accepts liability subject to terms
As long as total premiums received more than covers claims it is viable
What are the three horse sectors of insurance?
Personal lines
Life insurance/assurance
Commercial lines
Difference between life assurance and insurance?
Insurance - if die within period of time
Assurances- when someone dies irrespective of when
What forms can life assurance/insurance take?
Term insurance policies
Whole of life
Endowment - combines life insurance and savings (will repay mortgage should holder die)
Risk of insurance policies
Insurance company may fail
Investment management involves?
The investment of clients assets to meet predetermined objects
Objectives of investment fall into what categories?
Maximise returns
Match liabilities
What are collective investment schemes?
Pool money into large funds which can be invested on their behalf by professional fund managers
Advantages of collective investment schemes?
Small amounts Professional fund managers Dealing costs split Diversified spread reduces risk No capital gains tax Exposure to foreign stocks Different funds for different objectives Specialisation
Disadvantages of collective investment schemes?
Can’t choose own investments
Manager may change jobs, future management less certain
Large funds find it difficult to invest in companies with small cap due to small quantities available
Fees
Collective funds may be either?
Onshore- held and managed in UK, UK regs and taxes
Offshore
Onshore funds may take what forms?
Unit trusts
Open ended investment companies
Investment trusts
What is a unit trust?
Open ended fund
Creates new units when new investors subscribe and can cancel units
Monitored by trustees
Objectives in trust deed
Dual price (bid/offer)
What are the three parties involved in the operation of a unit trust?
Unit trust manager (market, price, buy/sell units)
Trustee - normally bank or insurance company, holds investments on behalf (safeguards, regs)
Fund manager - deals in funds assets
The value of the underlying fund in unit trusts is?
Determined regularly (normally daily) as the VALUATION POINT
Unit trusts, if purchases exceed sales or vice versa?
Purchases exceed sales, unit trust manager must create new units and invest excess
Sales exceed purchases, must legislate some unites (sell some investments)
Unit trust managers acts as a?
Market maker for units
Quotes buying and selling prices
Profit made on different eve teen offer (selling) and bid (buying) price
Known as bid-offer spread
What are Open ended investment companies?
Open ended, can continually issue and redeem own shares
Must use a depositary to look after funds
Single or dual pricing at valuation point
Listing optional
What are investment trusts?
Public limited companies who’s shares are listed on a stock exchange
Closed ended
Is sure fixed amount of shares
Traded between buyers and sellers
Pricing government by supply and demand- premium or discount
What do net asset value?
Price of unit trust or OEIC based on NAV of the fund
Primary responding of each fund manager is the calculation of an accurate NAV each day
Use NAV to make decisions
What are the three alternative investment management styles?
Active
Passive
Hybrid
What is active management?
Changes portfolio on regular basis
At times winners can be found
Attempt to time purchases or sales on basis of info to make abnormal returns
What is passive management?
Believe in the efficient market hypothesis
Design funds to mirror specific indices without attempting to beat the market
Little active intervention
May need some in response to events
What are hybrid managers?
Outperform indices
Less passive approach
Mixture of passive and active
What is private equity?
Source of medium to long term finance for an unlisted company, in return for an equity stake
Main source are private equity firms (larger sums at later stage) and business angels (individuals who invest smaller amounts at early stage)
Private equity investors look for potential for realistic growth
Seek an exit route when they believe the growth has fallen to normal levels
Private equity exit routes can be achieved by?
Floating - take public Trade sale Management buy out Share repurchase Refinancing Liquidation
The Bank of England aims to?
Promote the food of the people of the UK by maintain monetary and financial stability
What is monetary stability?
Prices are stable and there is confidence in the local currency
What is financial stability?
Can be achieved through detecting and reducing threats to financial system as a whole
Maintaining public confidence
What does Bank of England do?
Governments bank, manages its bond finance and uses to affect interest rates
Lender of last resort- funds in exceptional circumstances
