System Flashcards
Financial markets: List the two ways in which a transfer of funds takes place in an economy. What is the main deference between these two?
Funds can flow directly through financial markets of indirectly through intermediation markets where finds flow through financial institutions first.
Financial markets: suppose you own a security that you know can be easily sold in the secondary market, but the security will sell at a lower price than you paid for it. What would this mean for the security’s marketability and liquidity?
As the price of security is lower than that you paid for it, it has a lower degree of liquidity to you, the owner. That is because the security cannot now be sold without a loss in value to the owner. Marketability refers to the ease to which a security can be sold or converted to cash. The information in the problem does mention a drastically lower price and so we must conclude that the security’s marketability on not affected
Primary markets: Identify whether the following transactions are primary market or secondary market transactions.
A Jim Hendry bought 300 shares of AGL Energy through his share broker.
B Candy How bought $5000 pf AGL energy bonds from the company.
C Hathaway Insurance Company bought 500,000 shares of AGL Energy when the company issued shares.
A Jim Hendry bought 300 shares of AGL Energy through his share broker.
SECONDARY
B Candy How bought $5000 pf AGL energy bonds from the company.
SECONDARY
C Hathaway Insurance Company bought 500,000 shares of AGL Energy when the company issued shares.
PRIMARY
Investment banking: Cranbourne Ltd is issuing 10,000 bonds, and its investment banker has guaranteed a price of $985 per bond. The investment banker sells the entire issue to investors for $10,150,000.
a. What is the underwriting spread for the issue?
b. What is the percentage unwriting cost?
c. How much did Cranbourne raise?
a. $300,000 ($10,150,000 - $985 x 10,000)
b. 3.05 per cent ($30/$985)
c. $9,850,000 ($985 x 10,000)
Financial markets: What is the main difference between money markets and capital markets?
Money markets, are markets in which short-term debt instruments with maturities of less than one year are bought and sold.
Capital markets, are markets in which equity securities and debt instruments with maturities of more that one year are sold.
Market efficiency: Why is it important to the broader economy to have an efficient and effective financial system?
A well-developed financial system is critical for the operation of a complex economy such as that of Australia as it facilitates commercial, retail and government transactions in a timely, low cost and reliable way. An economy cannot function efficiently without a competitive and sound financial that gathers money and channels it into the best investment opportunities. An efficient and effective financial system will also produce actual and timely information to enable effective financial decision making, which also important in the complex financial world of today.
