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Investments > Opportunity set - What can we invest in? > Flashcards

Opportunity set - What can we invest in? Flashcards

1
Q

what is an asset class

A

a group of financial instruments which have similar financial characteristics and behave in a similar way in the marketplace

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2
Q

what are the traditional asset classes

A

cash or cash equivalents

stocks or equities

bonds or other fixed income investments

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3
Q

what are cash products also known as

A

money market instruments

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4
Q

examples of money market instruments

A

treasury bills
repurchase agreements
commercial paper, commercial deposits

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5
Q

what is the maturity date on the money market

A

less than 1 year

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6
Q

how does all debt end up being a money market instrument at some point

A

when maturity date reaches less than 1 year

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7
Q

why is equity always a capital market product and never cash

A

it will never expire
in theory a business can run forever

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8
Q

what are repurchase agreements

A

short term lending between banks

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9
Q

what are treasury bills

A

short term US Government bonds

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10
Q

what are commerical paper and commercial deposit

A

short term borrowing that banks use

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11
Q

why are cash products low risk

A

liquid
short term so predictable

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12
Q

which type of bonds are the most liquid

A

government bonds

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13
Q

which has more credit risk:
- government bonds
- corporate and bank bonds

A

corporate and bank

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14
Q

example of an asset backed bond

A

mortgage

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15
Q

what are green bonds / sustainable bonds

A

proceeds must e used for something environmental or social

the coupon of the bond is linked to KPI, steps up if the company fails to meet them

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16
Q

benefits of green bonds

A

linking progress on sustainable development goals to the cost of borrowing

keeps companies accountable for their actions

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17
Q

what is a bond with an embedded option

A

the person who has borrowed can pay back early or the lender is able to ask for the borrower to pay back early

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18
Q

what are supernational government bonds

A

not tied to any one government

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19
Q

what are municipal government bonds

A

local government borrowing

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20
Q

what are sovereign government bonds

A

national borrowing

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21
Q

what are the 3 types of government bonds

A

supranational
sovereigns
municipal

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22
Q

what are the two types of corporate bonsd

A

secured
unsecured

23
Q

what bond ratings are of investment grade

A

BBB- and above

24
Q

what is a floating rate bond

A

where the coupon is tied to a benchmark rate

25
Q

what does residual claim mean

A

after the wind up of a business, the equity holder will not get a penny until all of the other debts of the business are paid off

26
Q

what is a hybrid security

A

preference share

27
Q

examples of companies which are still private

A

lidl
aldi
ikea
dunnes stores

28
Q

what are angel or seed investors

A

invest in business in a very early stage - just as the idea is forming, with few to no customers

29
Q

what is venture capital

A

investment at the early stage of growth
venture capitalists put small amounts in lots of companies hoping that some of them succeed

30
Q

what are private equity firms

A

invest when the company has a stable cash flow

these firms advise management and at exit time tend to sell on to other private investors

31
Q

how to judge investments in terms of risk

A
  1. equity is the last in the queue - most risky
  2. creditworthiness
  3. maturity - long is more risky
  4. convertibility - how liquid and can you trade it, which markets can you trade it in (eg limited by countries or currencies?)
32
Q

examples of alternative investments

A

derivates
venture capital
private equity
currencies
real assets eg real estate
crypto currency
hedge funds

33
Q

what is a future or a forward in the derivate market

A

delayed purchase of an asset with an agreed price now

34
Q

what is an option in the derivate market

A

like an insurance contract, you may or may not use it

the buyer has the right to buy or sell and asset in the future at a certain price

35
Q

examples of how ryanair use deriviates

A

they don’t know now what they will pay for oil in 3 months time
they don’t buy oil and store it as their planes need to top up everywhere and the storage would be expensive

36
Q

how are derivates like bets

A

they allow transfer of risk

you can make exposure to anything so long as someone is willing to take up the other side of the bet eg. amount of rainfall in a year

37
Q

reasons not to invest as an individual and to instead use investment funds

A

-> professionals may be able to make better returns
-> economies of scale eg lower transaction costs (buying in bulk etc)
-> increase asser diversification
-> more companies can be analysed

38
Q

what does EFT stand for

A

Exchange Traded Fund

39
Q

Types of investment funds

A

Investment funds investing in a mixture of stocks and bonds

EFTs - bought and sold like shares

Hedge Funds

40
Q

Are hedge funds available to retail investors

A

no only to large, sophisticated investors

41
Q

what types of assets do hedge funds invest in

A

more risky assets

42
Q

are hedge funds regulated

A

no

43
Q

are EFTs regulated

A

yes

44
Q

what is the bid price

A

the price a dealer is willing to buy at

45
Q

what is the ask priec

A

the price the dealer is willing to sell at

46
Q

what is the bid ask spread

A

the difference between a dealer’s bid and ask price

47
Q

what is a market order

A

a buy or sell order that is to be executed immediately

48
Q

what is a price contingent order

A

traders specify buying or selling price

49
Q

what does buying on margin mean

A

the investor borrows part of the purchase price on stock

50
Q

what is the maintenance margin

A

minimum equity that must be kept in the margin account

51
Q

what is the initial margin requirement

A

50%

52
Q

how do short sales work

A

investor borrow stock from a broker and sells it

when the price is lower buy them back and return to broker

keep the profit

53
Q

why might private trading outperform public

according to The Economist, Privacy and its limits, Jan 20th 2020

A

Private capital reduces agency costs (not constantly monitored by the public but instead held closely by a few hands)

54
Q

what do private equity investors investors eg angel and venture add to the firms

A
  • raise efficiency
  • raise growth
  • raise profitability
  • if its a family owned or smaller business, the private firm has better management habits and skills
  • they back innovation, speedier product launces

Investments (19 decks)

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