TOPIC 1 - financial markets Flashcards
real assets meaning
Assets that produce goods and services
Financial assets meaning
Claims to the income from real assets
What does real assets generate
Income
Financial assets are often called?
Securities
What are traded in financial markets
Securities
Examples of securities
Bonds and common stock
What is a financial market
Where securities are traded
Financial markets enable what?
The exchange of previously issued securities
What do financial markets facilitate
Capital raising by enabling new issues of securities
Example of a financial market
London stock exchange
What is a primary market
Where new security issues are sold to the initial buyers
Whats a common way for firms to raise capital
by selling initial securities
What are investment banks elected to manage
capital raising
What is a secondary market
Where previously-issued stocks are traded
Common stock represents what
An ownership stake in a firm
Each common stock gives the holder the right to
Have one vote in annual meetings
Have a share in the dividends paid
Who do shareholders elect
The board of directors
What is a stock market index
A performance measure of a group of stocks in the market
Example of a stock market index
S&P 500, FTSE 100
A stock market index is often interpreted as what
A measure for the whole stock market
What are the issues with using indexs as the entire market
Are the firms representative of the whole market
How are individual firms weighted
What are the main differences in preferred stocks
Firms pay dividends to them first
No voting rights
Whats more risky PS or CS
PS as dividends prioritized
The dividends in PS are what
Cumulative and prioritized
Sometimes PS can be converted to what
A fixed number of CS
Whats the IPO
Initial public offeringW
What is IPO
A company’s first equity issue made available to the public
When do IPOS occur
When a privately held company decides to go public
What is a SEO
Secondary equity offering
When do SEOs occur
When an already publicly traded company issues additional equity
What is it called when you lend money in the short run
Short-term fixed-income securites
What does short term mean in money markets
A maturity of less than a year
Why are money market securites generally low risk
AS most trade in large denominations so households can buy a little bit of the large diverse portfolio
What is a certificate of deposit
A time deposit with a bank - depositor may not withdraw before the maturity date
When are principals and interest paid by the bank
At the end of the fixed term
Where can certificates of deposit be bought
From banks or from a broker
Who backs treasury bills
The government
Why are treasury bills considered the least risky money market
As they are backed by the government so wont default
Where can Treasury bills be purchased from
Directly at auction or a government security dealer
What is a commercial paper
A short-term unsecured debt note, issued by well known companies
Where are commercial papers often traded
Through dealers
What type of security is a commercial paper
Discount security
What maturities are in bond markets
Over one year
What is a bond
A debt security that is committed to pay back to the holder the principal and coupon
What is a bond principal
The cash amount borrowed and paid back at maturity
What is a bond coupon
The periodic interest payments
Where are most bonds traded
At over-the-counter dealer markets
What are treasury notes
Government bond backed by US gov,maturities up to 10 years
What are treasury bonds
A gov bond issued by the US gov
what is a gilt
Government bonds of the UK and other commonwealth countires
What is a corporate bond
Refers to a bond issued by a corporation
What is a secured bond
Supported by collateral in event of bankruptcy
What are unsecured bonds
No collateral
What are callable bonds
Gives the issuing firm the right ot repurchase at a set price
What is a convertible bond
Investors can convert bonds into a set amount of equity shares
What bond protects against inflation
treasury inflation protected securities
What bonds are issued by states and local governments
Municipal bonds
What are eurobonds
Bonds in another currency - Euros in this case
Financial markets are generally very what
Competitive
Investments face a what
Risk-return trade-off
What does financial markets being competitive imply
Markets are efficent
Investments have risk to profit ratio
Why are financial markets important
Allow optimal allocation of funds
Optimal allocation of risk
Allows smooth consumption
Who are the key players in the financial markets
Capital providers
Capital recipients
What are capital providers
People who supply funds for a future return
What are capital recipients
People who seek funds for their investments at the cost of interest payments
What third parties are there in markets
Financial intermediates - banks
Brokers
Dealers
Investment bankers
What do financial intermediaries do
Receive money from capital providers and reinvest the proceeds to capital recipients
What do commercial banks do
Recieve deposits from savers and re-lend the money to borrowers
What is a commercial banks profit
The difference in borrowing and lending interest rates
How do investment companies work
Receive capital from a pool of investors and reinvest that in various securities - charge a fee to make money
What is a broker
A commissioned agent of a buyer who allows trade by locating a seller to complete
What does a broker not do in the asset they trade
Take a position - they do not maintain inventory
What are the profits for a broker
The commission they charge on their sales
Whats the difference between dealers and brokers
Dealers do take a position and no commission - buying shares and selling them themselves
How do dealers make profits
Buying assets at a lower price and reselling them at a higher price
What are the 3 activites an investment banker does
advise
Underwriting
Sales assistance
What advising do investment bankers do
Advising companies whether they should issue bonds and stocks and what conditions
What underwriting role do investment bankers use
Guaranteeing companies a price on the securities they issue
What sales assistance role do investment bankers do
Assisting in the sale and marketing of new securities
