Topic 1: The Role And Structure Of Financial Markets Flashcards
What is the term used for markets where Long-Term borrowing and trading take place?
Capital Markets
• Bonds
• Equity (Shares)
What is the term used for markets where Short-Term borrowing and lending take place?
Money Markets
• Interbank
• Treasury Bills
• Commercial Paper
From a company perspective, what is the purpose of the equity market?
The equity market (Shares) is used to finance very long term investments
• New Branches
• New Equipment
• Research and Development
Which two opposing groups take part in the markets and what compromise will they have to make?
Buyers and Sellers
Sellers want the highest possible price and Buyers want the lowest, a compromise will need to be made.
What are the six main functions of the Bank of England in the UK economy?
- Issue New Bank Notes
- Banker to the Banks
- Banker to the Government
- Adviser to the Government
- Foreign Exchange Markets
- Lender of Last Resort
Why are the Foreign Exchange markets necessary?
- Short-Term Investments - High interest rates in another currency at the time.
- Long-Term Investments - Shares/New Outlets
- International Goods - Raw Materials
- International Services - Financial Services
What is the function of the reinsurance market?
Insurers who have already accepted risks, parcel up and sell ‘bits’ of them to other insurers, while themselves buying parts of others.
All the risk insured are then divided amongst multiple insurers.
What are the three main ways in which new shares can be offered to the Equity (Shares) market?
- Prospectus Issue - Shares offered through an investment bank. The bank allocates shares and may underwrite the issue of them.
- Rights Issue - The company offers its existing shareholders new shares in proportion to their existing holding. Usually at a discount rate.
- Private Placement - New shares are ‘placed’ with institutional investors.
What is an IPO in the equity (Shares) market?
When a private company first sells its shares to the public, it is known as the Initial Public Offering (IPO) or Floatation.
In relation to time span, what is the difference between Commercial Paper, Medium-term Notes, and Bonds?
- Commercial Paper - Up to 1 year.
- Medium-term Notes - 1-5 years.
- Bonds - 5 years +
In what circumstance could a company borrow money at a favourable interest rate in the Commercial paper market?
Corporate bodies with a good credit rating will be able to borrow for a lower rate.
‘Commercial Paper’ is used for securities up to 1 year. The borrowing company issues a commercial paper, an unsecured promissory note, at a discount to face value.
Why are Treasury Bills considered to be a safe investment?
The risk of default it effectively zero as the government is the issuer and borrower of money.
Treasury Bills are effectively short-term Gilts sold by the government by the UK debt management office.
They are issued for periods less than a year.
They do not pay interest - ‘Zero-Coupon Securities’ - Issued at a discount to their par (face) value on the redemption date.
What are the three main member categories of the London Stock Exchange (LSE)?
- Agency Brokers - Acts as the clients agent. Takes the order then contacts a market maker to execute.
- MarketMakers - Holds Stocks in their own name, makes a profit by anticipating market movement.
- BrokerDealers - Purchase Shares from clients then sells on the market (or Vice Versa)
What is the Interbank market?
The Interbank market is for large institutions to borrow and lend large, unsecured, wholesale amounts.
Banks now practice liability management instead of asset management, loaning before having funds.
The London Interbank Offered Rate (LIBOR) is used, plus a premium. More of a premium for banks with a lower credit rating.
Lending for periods of 0-6months.
In simple terms, how is the rate of interest on a repo represented?
The interest rate is reflected in the difference between the sale price and the repurchase price.
Given as a % per annum.
