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P0 > Unit 1 - Financial Institutions > Flashcards

Unit 1 - Financial Institutions Flashcards

1
Q

What does the Bank of England do?

A 
Central bank. 
Carries out govt policy
Issues bank notes
Acts as banker to commercial banks.
Sets interest rates
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2
Q

Influence of Bank of England on money markets

A
  • Bank intervenes in mmarkets to influence interest rates.
  • Looks to encourage development of private sector markets
  • Satisfies marginal liquidity requirements of banks (through 2 week repos), ensuring overall liquidity
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3
Q

What are money markets?

A

Cash deposits and short term securities (T bills and bills of exchange)

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4
Q

Influence of Bank of England on currency markets

A

Govt holds gold and foreign currency (foreign reserves).

Bank sells these for £ (therefore reducing £ in market, £ rises) and vice versa

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5
Q

How does Bank of England influence markets?

A

Money markets to set interest rates

Foreign reserves to influence exchange rates

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6
Q

What is the Debt Management Office?

A

Responsible for issuing Treasury Bills in a weekly auction

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7
Q

New issues of gilts - DMO

A

When Govt has Public Sector Net Cash Requirement, it instructs DMO to sell gilts:

  • Auctions - for public offerings
  • Tap stocks - to Gilt Edged Market Makers
  • Syndication - issuer appoints group of banks to manage sale
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8
Q

Buying gilts - DMO

A

DMO tends to buy gilts weeks/months before it matures to prevent big cash call. May buy back if a Public Sector Debt Repayment

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9
Q

Regulation - DMO

A

15 GEMMS - only them allowed to buy/sell gilts from Bank/DMO

- given favourable tax treatment

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10
Q

Quantitative Easing

A

Monetary policy to increase supply of money.

1) Central bank credits own account with money it creates
2) Purchases financial assets (e.g. gilts) - open market ops
3) Or changes fractional reserve system

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11
Q

Stock exchange - key roles

A

1) Raise new finance for companies

2) Provide a secondary market for investors

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12
Q

Stock exchange - main lenders

A
  • Pension funds

- Life insurers

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13
Q

Securities dealt on stock exchange

A
  • Gilts/bonds/bulldogs
  • OS, PS, debentures, ULS, Eurobonds
  • No money markets or derivatives
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14
Q

Stock exchange markets

A

Gilt edged market
UK fully listed securities
Alternative investment market (AIM)
Overseas securities

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15
Q

Role of SE - provide a market

A

SEAQ - stock exchange automated quotations - market makers enter quotes into SEAQ, deals over phone

SETS - stock exchange electronic trading service - 200 FTSE stocks - firms display bid and system automatically matches orders

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16
Q

Role of SE - regulate market

A

SE recognised under FSMA2000

Members - need to follow standards
Transactions - price/time/volume of trades must be reported
Companies - listing requirements

17
Q

Role of SE - settlement of trades

A

Registrar needs to be informed, share/bond cert transferred and money changes hands.

Equities - 2 days on CREST
Gilts - day after

18
Q

Role of SE - providing information

A

Stock exchange daily official list (SEDOL) shows price/volume of all transactions

19
Q

Derivative exchanges

A

Over the counter (traded directly) or through exchange - use clearing systems to prevent counterparty risk

20
Q

Investment banks

A
  • Financial advice (M&As, raising capital, issuing finance/eurobonds)
  • Fund management (manage unit trusts, pension funds, eurobond market)
  • Money market operations (accept bills of exchange, hold T bills, issue certs of deposit)
  • Act as brokers for OTC derivatives, trustees for debenture issues
21
Q

Clearing banks

A

Funds come from current accounts, savings accounts from private individuals through high street
Banks lend money through overdrafts and loans

22
Q

Clearing banks - investment markets

A

CBs have big influence on money market, bill markets, gilt markets etc
Lend to each other based on LIBOR rate

23
Q

Building societies

A
  • Not as prominent in commercial money market
  • Lending dominated by house-purchase mortgages
  • Smaller than banks

Will invest in short dated gilts or other banks/BS with CODs

24
Q

Investment trusts

A

Companies with directors, investment managers and shareholders. Listed on SE and raise debt/equity from other investors.
Hold money in other companies/gilts/property - specialist
No change in total no of shares

25
Q

Price of share in investment trust

A

Supply/demand - usually at discount to NAV, as investment management charge and shares less marketable than actual asset (e.g. easier to buy BP shares)

26
Q

Split capital

A

If trust has a set wind up date:

  • Capital shares
  • Income shares
27
Q

Unit trust

A

Not companies - set up by a company, has mgmt company, trustees (usually clearing bank) and investors. Units bought/sold from management, not other investors. Don’t raise D/E. Lots of restrictions, so invest in shares.

28
Q

Unit trust price

A

Market value of assets / no of units. Units sold at offer price which is 6% higher than bid price (mgmt buy units back at bid price and so make profit)

MVA = offer pricing (if UT expanding)
MVA = bid pricing (if UT contracting)
29
Q

Open ended investment companies (OEIC)

A

Have characteristics of ITs (companies with share price) and UTs (new shares created when money invested, with price reflecting net asset value)

30
Q

Investment management companies/Fund managers

A
  • Front office - buy/sell investments, asset allocation, stock selection
  • Back office - transaction processing, custody
31
Q

Issues with fund managers

A
  • Small no of companies dominate market
  • Herd behaviour
  • Focus on short term performance
  • High fees
  • Poor action on corporate governance
  • Churning of portfolios to generate commission
32
Q

Self administered pension funds

A

Will buy medium/long dated investments

33
Q

Life insurers

A

Typically invests in equities and FI securities. Has lots of medium/long fixed liabs (e.g. WP gtees). Some liabs are inflation linked, e.g. WP gtees. Depends on level of free assets for solvency.

34
Q

General insurers

A

Typically invests in short/medium dated FI and MM. GI business is short term and variable (e.g. catastrophes).
Some liabs index linked as payments made are value at time

35
Q

Settlement - DMO

A

CREST registry

P0 (9 decks)

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