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Financial Management > Quiz 2 > Flashcards

Quiz 2 Flashcards

1
Q

Investment banking definition

A

refers to activities related to underwriting and distributing new issues of debt and equitiy securities

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2
Q

Two different types of IB offerings

A

Public offerings and Private offerings

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3
Q

What are public offerings

A

represent the sale of a security to the public at large. Securities may be underwritten on a best efforts or a firm commitment basis

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4
Q

what are private offerings

A

an investment bank acts as a private placement agent for a fee, placing the securities with one or a few large institutional investors

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5
Q

other way IB may participate

A

may participate as an underwriter in government, municipal, and morgaged-backed securities

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6
Q

Why does VC exist

A

difficult for new and small firms to obtain debt financing from CBs because CBs not generally willing to make loans to new companies with no assets or business history

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7
Q

Venture capital definition

A

professionally managed pool of money used to finance new and often high risk firms

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8
Q

what do VC get to invest in untried companies and managers

A

equity investment in firm

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9
Q

what type of investors are VC investors

A

not generally passive investors, provide valuable expertise to firm’s managers and may help with recruiting

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10
Q

two different types of vc firms

A

institutional vc and angels

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11
Q

what are institutional vc firms

A

business entities whose sole purpose is to find and fund the most promising new firms

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12
Q

what are angel investors

A

weathly individuals who make equity investments

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13
Q

what is trading similar to

A

market making

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14
Q

what does a trader do

A

take an active net position in an underlying instrument or asset

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15
Q

what are the 6 different types of trading activities

A

position trading, pure arbitrage, risk arbitrage, program trading, stock brokerage, electronic brokerage

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16
Q

what is position trading

A

involves purchases of large blocks of securities on the expectation of a favorable price move

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17
Q

what is pure arbitrage trading

A

involves buying an asset in one market at one price and selling it immediately in another market at a higher price

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18
Q

what is risk arbitrage trading

A

involves buying securities in anticipation of some information release

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19
Q

what is program trading

A

simultaneous buying and selling of a portfolio of at least 15 different stocks valued at more than $1 million using computer programs to initiate such trades

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20
Q

what is stock brokerage trading

A

involves trading securities on behalf of customers

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21
Q

what is electronic brokerage trading

A

involves direct digital assets, via internet, to the trading floor, therefore bypassing traditional brokers

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22
Q

what is the securities investor protection corporation (SIPC)

A

it protects investors against losses of up to $500,000 on securities firm failures

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23
Q

is the SIPC an agency or establishment

A

no, not an agency nor establishment of US government, has no authority to investigate or regulate its member broker dealers

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24
Q

when was SIPC created

A

under the Securities Investor Protection Act of 1970 as a non-profit membership corporation

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25
Q

what does the SIPC do

A

oversees the liquidation of member broker-dealers that close when the broker-dealer is bankrupt or in financial trouble and customer assets are missing

focus on restoring customer cash and securities left in hands of bankrupt of otherwise financially troubled brokerage firms

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26
Q

what do life insurance companies do

A

they accept or underwrite risk that a perscribed event will occur for insurance premiums

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27
Q

what is underwriting

A

a major part of life insurance companies, the process in determining which risks should be accepted and which should be rejected

and then for accepted risks, underwriters must determine how much to charge (in form of premiums)

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28
Q

adverse selection problem

A

exists because customers who apply for insurance policies are more likely to be those more in need of coverage

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29
Q

Assets of life insurers

A

concentrate asset investments at the longer end of maturity spectrum (corportate bonds, equities, government securities)

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30
Q

liabilities of life insurers

A

net policy reserves (76.9% of total liabilities)
to meet unexpected future losses, life insurers hold a capital and surplus reserve fund with which to meet such losses

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31
Q

what is loss risk

A

measures actual losses incurred on a specific policy line

calculated as ratio of losses incurred to premiums earned

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32
Q

what is expense ratio

A

calculated as expenses incurred (before federal income tax) divided by premiums written

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33
Q

key feature of loss risk

A

the actuarial predictability of losses relative to premiums earned, which are premiums received and earned on insurance contracts because time has passed without a claim being filed

34
Q

what is generally true of loss risk

A
  • max levels of losses more predictable for property lines than for liabilty lines
  • loss rate more predictable on low severity, high frequency than on high severity low frequency lines
  • long tail risk exposure makes estimation of expected losses difficult
  • loss rates on all P&C property policies are adversly affected by unexpected increases in inflation, while liability lines may be subjected to social inflation as reflected by juries willingness to award punative and other damages at rates far above underlying rate of inflation
35
Q

what is an alternative risk to managing risk on a P&C insurer’s balance sheet

A

reinsurance, ie insurance for insurance companies

36
Q

what is a combined ratio

A

measure of overall profitability of a line

37
Q

how is comibed ratio calculated

A

loss ratio plus ratio of loss adjusted expenses to premium earned as well as commission and other costs to premiums written plus any dividends paid to holders

38
Q

what is investment yield

A

net investment income divided by premiums earned

39
Q

what is operating ratio

A

measure of overall profitability

calculated as the combined ratio minus the investment yield

40
Q

number of mutal funds over time

A

equity funds fast growth, 85-2007, about stable since 07 most out of any

fast growth overall until 07 then decrease in 10 and stable since

41
Q

what does a money market mutal fund do

A

provides an alternative investment opportunity to interest-bearing deposits at commerical banks

42
Q

who owns majority of both long and short term mutal funds

A

house holds

43
Q

three aspects of investors returns in a MF

A
  1. portfolio earns income and dividends on those assets
  2. capital gains occurs when MF sells for profit
  3. sale of additional MF shares and profitable investment made with the funds from these shares can produce a capital appreciation that adds the value of all shares in the MF
44
Q

when are mutal fund assets assessed

A

mutal fund assets are normally market to market daily (managers of funds calculate current value of each share by computing daily market value of funds total asset portfolio less any liabilities, and then dividing by amount of outstanding shares)

45
Q

what is the net asset value (NAV) of a share

A

equal to market value of assets in the MF portfolio divided by the number of outstanding shares

46
Q

3 types of mutal fund costs

A

Load fund, no-load fund, 12b-1 fees, operating expenses

47
Q

what are load funds (MF cost)

A

up front (one time) sales/ commission charge that investor must pay

48
Q

what is a no-load fund

A

does not charge up front sales or commission charges on the sale of MF shares to investors

49
Q

what are fund operating expenses (MF cost)

A

annual fees given to investors so that fee = operating expense, management fee is charged to meet operating costs

50
Q

what are 12b-1 fees

A

relate to distribution of MF shares

fees that are used to pay marketing and distribution expenses, which cannot exceed 0.75% of a funds average net assets per year

51
Q

advantages of fintechs to banks

A

fintech advantages: being unburdened by regulators, legacy IT systems, branch networks, not having need to protect existing businesses, possessing an innovation mindset, adjility, and a consumer centric perspective

52
Q

advantages of banks over fintech

A

3 C’s: customers, compliance, capital

53
Q

how is the relationship between banks and fin tech changing

A

most fintech CEOs expect incresing fintech-bank partnerships in future, can have mutually benefical partnerships

54
Q

4 stages of fintech startups and banks

A
  1. “rent a bank”
  2. banks buy assets and take equity stake in fintech startups
  3. fintech firms provide technology and infastructure to banks
  4. banks develop in house fintech arms, fintech startups start apply for bank charter
55
Q

what is banking as a service (BaaS)

A

end to end process that allows fintechs and other 3rd parties to connect with banks via APIs so they can build bank offerings on top of bank’s infastructure to reach users outside of banks existing footprint

56
Q

what is open banking

A

a system that provides a user with a network for FI’s data using APIs.

57
Q

advantage to open banking

A

by opening APIs to sharing, 3rd parties have easier access to financial information for existing bank customers, which allows them to build new apps and services

58
Q

how are mid-market coporates characterized

A

sales between 5mill - 100mill per year
recognizable corporate structure
no ready access to deep and liquid capital markets

59
Q

short term commerical loans

A

original maturity of one year or less used to finance working capital needs and other short term funding need

60
Q

long term corporate loans

A

loans are used to finance credit needs that extend beyond 1 year like purchaing real assets, new venture start-up costs, and permanent increases in working captial

61
Q

First step of loan analysis

A

FI require business loan applications to provide cash flow information

62
Q

4 sections of statement of cash flows

A

CF from operating activities
CF from investing activities
CF from financing activities
Net change in cash and marketable securities shown

63
Q

which CF statement is most critical to FI in evaluating loan applicant

A

CF from operating activities

64
Q

what are the factors that impact the promised return that FI acheives on any given dollar loan (asset) amount

A

interest rate on loan
any loan fees
credit risk premium (m) on the loan
collateral backing the loan
other nonprice terms

65
Q

3 categories of direct and indirect fees and charges relating to loan

A
  1. loan origination fee (f) charged to borrower for application processing
  2. compensating balance requirements (b) to be held as generally non-interest bearing demand deposits
  3. reserve requirement charge (RR) imposed by the fed on the banks demand deposit, including any compensating balances
66
Q

what is the idea behind RAROC

A

rather than evaluate the actual or promised annual cash flow on a loan as a percentage of the amount lent (or ROA), the lending officer balances the loan expected income against the loans expected risk

67
Q

when is a loan approved by an FI using the RAROC

A

approaved only if the RAROC is sufficiently high relative to a benchmark return on equity capital

loan should be made only if the risk-adujsted return on the loan adds to the FI’s equity value, as measured by the ROE required by the FI stockholders

68
Q

2 reasons liquidity risk arises

A
  1. when FI liability holders such as depositors or insurance policyholders, seek to cash in their financial claims immediately
  2. when FI needs to fund loans immediately
69
Q

what is the liability side reason liquidity risk arises

A

FIs liability holder seeks to cash in their financial claims immediately, FIs must meet withdraws by borrowing additional funds or liquidating assets, some assets may be liquidated only at fire sale prices

70
Q

what is the asset side reason liquidity risk arises

A

when FIs need to fund loans immediately, loan commitment allows a customer to borrow funds from an FI on demand, and when a borrower draws on its loan commitment, the FI must fund the loan on the balance sheet immediately, FIs may meet this need by running down cash assets, selling off other liquid assets, or borrowing additonal funds

71
Q

what is the net deposit drain

A

the amount by which cash withdraws exeed additions, a net cash outflow

72
Q

2 major ways FI manage a drain on deposits

A

purchased liquidity management, stored liquidity management

73
Q

what is purchases liquidity management

A

an adjustement to a deposit drain that occurs on the liability side of the balnce sheet, DI manager utilizes the markets for purchased funds which are interbank markets, for short-term loans, can be expensive, availability may be llimited should the DI incur insolvency difficulties

74
Q

what is stored liquidity management

A

adujustment to a deposit drain that occurs on the asset side of the balance sheet, fi liquidates some of its assets, utilizing stored liquidity

75
Q

what is liquidity index

A

measures potential losses a DI could suffer as a result of a sudden (or fire sale) disposal of assets

76
Q

how does size of fire-sale asset size and fair market price affect asset portfolio

A

larger the differences between fire-sale asset prices and fair market prices, the less liquid the DI asset portfolio

77
Q

between what numbers will liquidity index always lie

A

between 0 and 1

78
Q

what are two regluatory standards developed by BIS for liquidity risk supervision

A

liquidity coverage ratio (LCR) and net stable funds ratio (NSFR)

79
Q

what is the liquidity coverage ratio

A

ensures a DI maintains an adequate level of high quality liquid assets that can be converted into cash to meet liquidty needs for a 30 day time horizon under an “acute liquidity stress scenario” specified by supervisors

80
Q

what does the net stable funds ratio do

A

takes a longer term look at liquidity on a DI’s balance sheet

Financial Management (2 decks)

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