Money and capital markets Flashcards
qwhat is a financial intermediary
an institute that facilitates financial transactions.
such as banks, insurance companies and other institutional investors that direct funds from those willing to invest/lend to those who want to borrow.
financial markets
A place or system that provides buyers and sellers the means to trade financial instruments,
including bonds, equities, the various international currencies, and derivatives.
financial market infrastructure
which is composed of payment systems, securities clearing and settlement systems and payment instruments.
such as visa
what are bonds
debt security that makes payment periodically
what are stocks
type of security that gives stockholders a share of ownership in a company
requirements for a financial market
- property rights
- transparency of the institutional frameworks
- confidence.
why do financial markets need transparency
helps reduce uncertainty and wild stock price fluctuations because all market participants can base decisions of value on the same data.
The SEC requires publicly traded companies to report their quarterly financials (called a 10-Q) and their year-end financials (called a 10-K).
why does a business need property rights
allocation of property rights in a society affects the efficiency of resource use.
This may improve the pricing mechanism.
what is a primary market
when new issues of a security are sold to initial buyers
what is a secondary market
when securities that have been previously issued are resold
name the two types of secondary market
exchange traded market- buyers and sellers meet in one central location to conduct trades (NYSE)
over the counter market- an intangible organisation (over the phone or linked by computers) who work for a financial institution.
what are the functions of a secondary market
price discovery- enables price to quickly reflect information
provide liquidity- ability to buy and sell securities quickly.
the fact this property exists
benefits of secondary market liquidity
(explains investor confidence, market stability)
Increased Investor Confidence:
Knowing that they can easily enter or exit positions without a significant impact on prices makes investors more willing to participate in the market.
Market Stability:
Liquid markets are generally more stable because large trades are less likely to cause significant price fluctuations. This stability is attractive to a wide range of market participants, including institutional investors.
give some examples of money market instruments
us treasury bills -short-term U.S. government debt obligation backed by the Treasury Department with a maturity of one year or less.
commercial paper- unsecured, short-term debt corporations issue to fund short- to middle-term obligations like payroll and seasonal inventory..
give some examples of capital
market instruments
stocks- share of ownership
corporate bonds- long term debt issues by rating agencies
us government bonds- long term debt
what is arbitrage pricing
Arbitrage pricing refers to the strategy of exploiting price differences for the same asset in different markets or between different financial instruments.
speculation
when the investor bets that a price of an asset will go in the favourable direction for him or her
what is market risk
the possibility of an investor experiencing losses due to factors that affect theoverall performance of the financial markets.
systematic risk (will be in exam)
the risk inherent to the entire market or market segment.
Due to the entire financial industry being related there is risk of financial contagion (spread of economic crisis)
what is a bank run (will be in exam)
when too many customer withdraw their money from the bank for fear the bank will become insolvent.
This decreases the banks liquidity making it even more likely for the bank to become insolvent
adverse selection
when one party in the negotiation has relevant information that the other lacks
tail risk (will be in exam)
Tail risk refers to the risk of extreme decrease in stock price which lie outside the range of normal expectations, often in the tails of a probability distribution.
moral hazard
the risk that of something happening because they have reason to believe the cost will be covered by the insurer.
for example if I get health insurance I may act more recklessly
what is a bond and what does it specify
a security with maturity longer than a year
maturity- the date at which the bond is repaid
par value- the amount to be repaid at maturity
coupons- “interest paid throughout the bonds lifetime”
what is the gordon model
it the stock pays dividends which are expected to grow at a constant
the stock price at period one/
equity risk- growth
(all calculated in numbers and not percent)
stock price in period one is calculated by adding the growth rate onto D0
how can I calculate dividend yield
annual dividend per year
———————————– x 100
market price of shares
how can I calculate capital gains yield
Ending Price−Beginning Price
——————————————— x 100
Beginning Price
when you add capital gains yield and dividend yield what do you get
total returns.
how to calculate expected returns using the app model
multiply each factor by their weighting then add the risk free rate
calculate using real numbers and not percentages
how to calculate expected returns using the capm model
expected return=
risk free+ (beta X risk equity)
how to calculate the price of a zero coupon bond
par value
1+interest ^years*
how to calculate the price of a bond
annual coupon rate/ interest rate
X
( 1
1+ ———————————-
1+ interest^number of years )
\+
par value ---------------------------------------------- 1+ interest ^number of years
what is a discount bond
when the price of the bond is below the par value
what is premium bond
when the price of the bond is above par value
what is algorithm trading
is a method of executing trades in financial markets using computer algorithms. These algorithms are designed to follow a set of predefined instructions and criteria to make trading decisions.
