Money and capital markets

Question 1

qwhat is a financial intermediary

Answer 1

an institute that facilitates financial transactions.

such as banks, insurance companies and other institutional investors that direct funds from those willing to invest/lend to those who want to borrow.

Question 2

financial markets

Answer 2

A place or system that provides buyers and sellers the means to trade financial instruments,

including bonds, equities, the various international currencies, and derivatives.

Question 3

financial market infrastructure

Answer 3

which is composed of payment systems, securities clearing and settlement systems and payment instruments.

such as visa

Question 4

what are bonds

Answer 4

debt security that makes payment periodically

Question 5

what are stocks

Answer 5

type of security that gives stockholders a share of ownership in a company

Question 6

requirements for a financial market

Answer 6

1. property rights
2. transparency of the institutional frameworks
3. confidence.

Question 7

why do financial markets need transparency

Answer 7

helps reduce uncertainty and wild stock price fluctuations because all market participants can base decisions of value on the same data.

The SEC requires publicly traded companies to report their quarterly financials (called a 10-Q) and their year-end financials (called a 10-K).

Question 8

why does a business need property rights

Answer 8

allocation of property rights in a society affects the efficiency of resource use.

This may improve the pricing mechanism.

Question 9

what is a primary market

Answer 9

when new issues of a security are sold to initial buyers

Question 10

what is a secondary market

Answer 10

when securities that have been previously issued are resold

Question 11

name the two types of secondary market

Answer 11

exchange traded market- buyers and sellers meet in one central location to conduct trades (NYSE)

over the counter market- an intangible organisation (over the phone or linked by computers) who work for a financial institution.

Question 12

what are the functions of a secondary market

Answer 12

price discovery- enables price to quickly reflect information

provide liquidity- ability to buy and sell securities quickly.

the fact this property exists

Question 13

benefits of secondary market liquidity

(explains investor confidence, market stability)

Answer 13

Increased Investor Confidence:

Knowing that they can easily enter or exit positions without a significant impact on prices makes investors more willing to participate in the market.

Market Stability:

Liquid markets are generally more stable because large trades are less likely to cause significant price fluctuations. This stability is attractive to a wide range of market participants, including institutional investors.

Question 14

give some examples of money market instruments

Answer 14

us treasury bills -short-term U.S. government debt obligation backed by the Treasury Department with a maturity of one year or less.

commercial paper- unsecured, short-term debt corporations issue to fund short- to middle-term obligations like payroll and seasonal inventory..

Question 15

give some examples of capital
market instruments

Answer 15

stocks- share of ownership
corporate bonds- long term debt issues by rating agencies
us government bonds- long term debt

Question 16

what is arbitrage pricing

Answer 16

Arbitrage pricing refers to the strategy of exploiting price differences for the same asset in different markets or between different financial instruments.

Question 17

speculation

Answer 17

when the investor bets that a price of an asset will go in the favourable direction for him or her

Question 18

what is market risk

Answer 18

the possibility of an investor experiencing losses due to factors that affect theoverall performance of the financial markets.

Question 19

systematic risk (will be in exam)

Answer 19

the risk inherent to the entire market or market segment.

Due to the entire financial industry being related there is risk of financial contagion (spread of economic crisis)

Question 20

what is a bank run (will be in exam)

Answer 20

when too many customer withdraw their money from the bank for fear the bank will become insolvent.

This decreases the banks liquidity making it even more likely for the bank to become insolvent

Question 21

adverse selection

Answer 21

when one party in the negotiation has relevant information that the other lacks

Question 22

tail risk (will be in exam)

Answer 22

Tail risk refers to the risk of extreme decrease in stock price which lie outside the range of normal expectations, often in the tails of a probability distribution.

Question 23

moral hazard

Answer 23

the risk that of something happening because they have reason to believe the cost will be covered by the insurer.

for example if I get health insurance I may act more recklessly

Question 24

what is a bond and what does it specify

Answer 24

a security with maturity longer than a year

maturity- the date at which the bond is repaid

par value- the amount to be repaid at maturity

coupons- “interest paid throughout the bonds lifetime”

Question 25

what is the gordon model

Answer 25

it the stock pays dividends which are expected to grow at a constant

the stock price at period one/
equity risk- growth

(all calculated in numbers and not percent)

stock price in period one is calculated by adding the growth rate onto D0

Question 26

how can I calculate dividend yield

Answer 26

annual dividend per year
———————————– x 100
market price of shares

Question 27

how can I calculate capital gains yield

Answer 27

Ending Price−Beginning Price
——————————————— x 100
Beginning Price

Question 28

when you add capital gains yield and dividend yield what do you get

Answer 28

total returns.

Question 29

how to calculate expected returns using the app model

Answer 29

multiply each factor by their weighting then add the risk free rate

calculate using real numbers and not percentages

Question 30

how to calculate expected returns using the capm model

Answer 30

expected return=
risk free+ (beta X risk equity)

Question 31

how to calculate the price of a zero coupon bond

Answer 31

par value

1+interest ^years*

Question 32

how to calculate the price of a bond

Answer 32

annual coupon rate/ interest rate

                       X

( 1
1+ ———————————-
1+ interest^number of years )

                         \+
            par value ---------------------------------------------- 1+ interest ^number of years

Question 33

what is a discount bond

Answer 33

when the price of the bond is below the par value

Question 34

what is premium bond

Answer 34

when the price of the bond is above par value

Question 35

what is algorithm trading

Answer 35

is a method of executing trades in financial markets using computer algorithms. These algorithms are designed to follow a set of predefined instructions and criteria to make trading decisions.