Must know banking terminology and concepts Flashcards
What is ROE and how do you calculate it?
- Return on equity
- Net income / Shareholders equity
What is intrinsic/inherent value?
Has value in and as itself
For example Gold has a high intrinsic value and Cryptocurrency has no intrinsic value
You can estimate intrinsic value by using a DCF model as the model forecasts free cash flows (FCFs) and then discounting them to the present date
What does DCF stand for, how do you calculate it, and what does it provide?
DCF stands for Discounted Cash Flow
CF is cash flow period i
r is interest rate
n is time in years before future cash flow occurs
DCF = CF1 / (1+r)1 + … + CFn / (1+r)n
Values an investment based on its expected future cash flows
What is ROTE and how does it differ from ROE?
Return on Tangible equity
Still calculated by net income / average shareholders equity
However it excludes intangible elements such as goodwill, debt, that can be converted into common stock
What is the Advisory in an Investment bank?
Part of the investment banking division. Have slightly more emphasis on providing advice
Rank the hierarchy of the Investment banking corporate ladder
- Analyst
- Associate
- Assistant VP
- VP
- Director
- Managing director
What is a bank?
Financial corporation that operates with borrowed money and organises the provision of capital to other companies
What news is industry standard for news and price data?
Bloomberg
What are bonds?
Bonds are debt instruments
They are loans which have been issued on standardised terms so it can be split up and traded
Bond issuance is the main job of debt capital markets and trading them takes place either on rates or credit desks
What is a brokerage?
A company that matches a buyers with sellers of securities
They make money out of charging commission or out of the spread
What is the buy side?
Ppl who work at hedge funds, mutual funds or in private equity. These are clients of the investment banks
What is the sell side?
Ppl who work at investment banks, speaking to clients on the buy side
What are the four main types of markets?
- Money markets - Short term financing for households and individuals - Maturity dates of up to one year (repayment)
- Capital markets - Medium to longer term financing for businesses and governments - Bonds and shares issued in primary capital markets and existing assets are then traded on secondary markets - DCM and ECM
- Forex markets - Where currencies are traded - Can either be traded now (spot markets) or on an agreed future date (forward markets)
- Cash markets - NOT SAME AS MONEY MARKETS - Securities are bought and sold rather than derivative claims on them
What are the roles of the sell side?
- Advise corporate clients on major transactions
- Facilitate raising capital, including debt and equity
- Mergers and Acquisitions
- Win new business (build relationships with corporates)
- Market and sell securities
- Create liquidity for listed securities
- Help clients get in and out of positions
- Equity research of listed companies
- Perform financial modelling and valuation
What are the roles of the buy side?
- Manage clients’ money
- Make investment decisions (buy, hold, sell)
- Earn the best risk adjusted risk on capital
- Perform in house research on investment opportunities
- Modelling and valuation
- Find investors and recruit capital to manage
- Grow assets under management (AUM) i.e total market value of investments that a person or entity manages on behalf of clients
What are capital markets?
- Part of the investment banking division responsible for helping corporate clients to raise money from the bond and equity markets.
- Capital market bankers gather feedback from investors, decide on pricing of securities and liase with sales and trading to get securities sold
What is compliance?
- Team responsible for ensuring other parts of the bank comply with regulations
- Responsible for arranging training, monitoring activity and advice to employees
What is corporate finance?
- Just another name for capital markets, with more emphasis on capital raising rather than execution and underwriting
What is coverage?
- Team with both advisory and capital markets specialisations serving requirements of particular client or sector
What are derivatives?
- Contracts between two parties which agree to exchange amounts of money based on something else.
- This is usually the securities price but it can be based on interest rates
What is distribution?
- Final stage of a capital markets transaction, coming after the underwriting
- This is the stage where securities are sold to investors
What are equities?
- Shares and securities which represent part ownership in a company
What is execution?
- The activity of actually making a transaction happen, once it has been agreed with a client
What is a future?
- A contract in which the parties agree to exchange the asset for cash at a fixed price and at a future specified date, is known as future contract.
What is a forward?
- An agreement between parties to buy and sell the underlying asset at a specified date and agreed price in future.
What is FICC?
- Fixed income, currencies and commodities
- One of two main parts of a sales and trading division
What is FIG?
- Financial Institutions Group, usually one of the largest teams in investment banking
- The team provides capital markets and advisory services to other banks and insurance companies
What is the front office?
- Staff who apply firms capital or have direct contact with clients
What is a hedge fund?
- Investment fund marketed only to other institutional investors and very rich individuals
- Charge higher fees and have fewer restrictions on investment strategies
What is the Investment Banking Division?
- IBD is one of two main divisions at an investment bank
- Sales and trading and IBD
- IBD is concerned with providing financial solutions to issuers of securities rather than to investors
- It is further divided into capital markets and M and A advisory
What is an IPO?
- The sale of a companies shares for the first time on a stock exchange. IPOs are run by the equity capital markets team in an investment bank and can be extremly profitable transactions
- Currently, due to market volatility, so far only 92 companies companies in 2022 have gone public while raising $9 billion dollars
- Compare this to over 1000 companies in 2021 raising $317 billion
- This is down to concerns about inflation and rising interest rates combined with the geopolitical uncertainty
- Hence companies are hesitant to go public and prefer to wait until market conditions support higher valuations and investor confidence is high.
- Saying this, when markets start to stabilise and investors gain confidence again, I would expect the number of IPOs to be much higher than a previously normal year due to this backlog.
What is M and A?
- Provide advice to companies on taking over and buying other companies, either on an agreed or hostile basis.
- This includes strategic advice on the actual deal, advice on valuation of targets and arranging financing
What are money markets?
- Markets for short term fixed income securities, used by banks and industrial companies to smooth out differences in the timing of their incoming and outgoing payments
What is Origination?
- In investment banking, the process of persuading a client to carry out a transaction with your bank
What is a primary/secondary market?
- First time securities are sold to the public, this is the primary market
- Trading in them afterwards is the secondary market
What is a prime brokerage?
- Provides services to hedge funds, such as looking after their settlement and back office functions and providing financing to them
What is private equity?
Investment funds which buy whole companies or large ownership stakes in specifically negotiated deals rather than shares quotes on the stock exchange
What are rates?
- In FICC, ‘rates’ are the opposite of ‘credit’
- It refers to the bonds and derivatives where value is driven by expectations about interest rates and credit risk can l largely be ignored
What is research?
- Teams in sales and trading which are responsible for valuing securities and issuing recommendations to investors as to whether to buy or sell them
What is risk management?
- The division responsible for measuring the banks exposure to risks based on securities it holds and the loans it has extended, and setting limits on them
What is Sales and Trading?
- One of the most important divisions in an investment bank
- S and T, sometimes called global markets, deal with brokerage activities
- Made up of FICC and Equities
What are securities?
- Tradable claims on future payments
What is securitisation?
- The process of buying a large number of smaller loans and bundling them into a special purpose vehicle which issues bonds to the public, effectively transforming the loans into securities
- e.g mortgages or credit card loans
What is the sell side?
Ppl who work at IB, speaking to clients on the buy side
What is settlement?
- The activities of making sure that records are updated and payments are sent to the right place after a securities transaction has been executed
What is a SPAC?
- A special purpose acquisition company
- SPV company which caries out an IPO despite having no actual business, to raise cash in order to acquire an existing company
What is a SPV?
- Special purpose vehicle
- A “brass plate” company formed by a bank in order to be the legal owner of some assets
What is spread?
- Difference between the price quoted by a brokerage to buy securities (the bid) and the price quoted to sell the same securities (the ask)
- Buying at the bid and selling at the ask is how brokerages make money
What is structuring?
- Design complex securities (usually involving derivatives) to achieve particular goals for either the investor or the issuer
- Can include specific tax treatment, particular mixtures of risk and reward, or bundling up of small loans into a larger security which can be publicly traded
What is a syndicate?
- Specialist team within capital markets which handles communication and relationships with other banks in transactions which involve a large number of investment banks
What is underwriting?
- Practice of buying securities from the issuer, then distributing them to the public
- During underwriting the bank is at risk because it is holding securities and so is exposed to movements in their value
- It takes a fee to compensate for this
- Managed by capital markets
