Overview of the financial system

Question 1

What is the financial system?

Answer 1

The financial system channels funds from where they stand to where they are needed.

Question 2

What is the structure of debt markets?

Answer 2

Short term (maturity < 1 year)
Long term ( maturity > 10year)

Intermediate term (maturity in between)
Pay interest
No ownership claim in the firm/issuer

Question 3

What is the structure of equity markets?

Answer 3

Long term by definition
Pay dividends/ capital gains (losses
Represents an ownership claim in the firm

Question 4

What is a primary market?

Answer 4

New security issues sold to initial buyers

Typically involves an investment bank who underwrites the offering.

Question 5

What is a secondary market?

Answer 5

Securities previously issues are bought and sold.

Examples include the LSE, NYSE and Nasdaq

Question 6

Why are secondary markets important?

Answer 6

Even though firms do not get any money from the secondary market they serve two important functions:

Provide liquidity, making it easy to buy and sell the securities of the companies.

Question 7

What do we classify markets by?

Answer 7

The maturity of the security.

Question 8

What are examples of internalisation of markets?

Answer 8

Foreign bonds

Eurobonds

Question 9

What is a foreign bond?

Answer 9

Denominated in a foreign currency

Targeted at a foreign market.

E.g. a Germany company sells a bond in the US.