QA Bank Part 3 Flashcards
Project owner (sponsor)
The future operator of the project outcome, for example the user of a new IT system), or seller of a new type of project
Project manager
Oversees the design, build and implementation of the project, for example the development and implementation of a new IT system or a new product.
role of the investment submission
- to summarize the results of the detailed project appraisal in a form that enables those with ultimate responsibility for deciding whether or not to proceed with the project to make an appropriate decision.
Suggest reasons why an investor might invest heavily in Treasury bills
- very risk-averse
- worried about the risk of default on other securities
- wants stability of monetary values
- is worried that the value of other assets may fall
- needs liquidity, eg to meed short-term liabilities
- or to meet uncertain liabilities
- wants diversification from other asset categories, eg equities.
Principle economic factors causing investors to increase holdings of money market instruments
- Expectations of higher interest rates (higher nominal income from money market instruments, and because both bond and equity markets are likely to fall)
- Start of a recession (equity market expected to fall, as would the bond market)
- Expected weakening of the domestic currency (making investment in overseas money market instruments attractive)
3 Reasons why a government may sometimes issue index-linked securities rather than fixed-interest securities
- to offer a range of different types of securities (attracting a range of different investors)
- it believes that inflation will fall so that index-linked issues will turn out to be a cheaper source of finance than fixed-interest debt
- it wants to convince the private sector that it will reduce inflation
Factors that influence the level and shape of the yield curve
- supply (size of fiscal deficit and funding policy)
- demand (institutional cashflow)
- current short-term interest rates
- expectations of future inflation and future short-term interest rates
- liquidity preference
- inflation risk premium
- exchange rate
- overseas bond yields (particularly US)
- other economic factors
- expected future returns on alternative investments
3 principal theories of the real yield curve
- Expectations theory
- Liquidity preference
- Market segmentation
Expectations theory
describes the shape of the real yield curve as being determined by economic factors, which drive the market’s expectations for future short-term real interest rates
Liquidity preference theory
Investors prefer to invest in more liquid, short-term investments because they are more certain that they can get their capital back at any time.
Longer-term investments are less liquid - an early redemption carries a risk of a significant fall in capital value due to the increased volatility of longer-term investments.
Market segmentation theory
Says that real yields at each term to redemption are determined by supply of and demand for real assets of that term.
Demand is generated principally by institutional investors with liabilities of a particular term.
Steps necessary to achieve an effective identification of the risks facing the project
- Start with a high-level preliminary risk analysis
- this should confirm whether the project is too high risk to continue
- Could investigate whether the necessary finance could be raised, and - if so - where it is likely to come from and who is managing the process of raising it.
- Hold a brainstorming session of project experts and senior internal and external people
- Use a desktop analysis to supplement this by identifying further risks
- Set out all the identified risks in a risk register
- A risk matrix could also be used.
Circumstances under which money market instruments may be temporarily unattractive
- General economic certainty (cash would give a lower return than on other assets)
- Expectations of falling interest rates (falling interest rates will stimulate economic activity and increase companies’profits)
- The end of a recession / start of a boom
- Expectations of a strengthening domestic currency
- If the investor is not risk averse or is not concerned with liquidity
