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AFM 121 > chapter 1 > Flashcards

chapter 1 Flashcards

The Capital Market

1
Q

what is a vital function served by financial market

A

the transfer of wealth from those who have extra wealth to those who need capital

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2
Q

what’s the purpose of financial markets

A

to drive economic growth by transforming savings into investments

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3
Q

what are the 3 components of this wealth transfer process?

A
  1. financial instruments
    2, financial markets
  2. financial intermediaries
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4
Q

define (investment) capital

A

capital incorporates the savings of individuals, corporations, governments, and other entities - it’s scarce + valuable, it’s only economically significant when it’s properly utilized

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5
Q

how can capital be utilized?

A
  1. direct investment
  2. indirect investment
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6
Q

define direct investment

A

investments in real assets that generate wealth directly (lang, buildings, equipment, human capital)

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7
Q

define indirect investment

A

investments in financial assets (stocks, bonds) which allows issuers of these securities to invest funds directly in wealth generating assets

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8
Q

what are some characteristics of capital

A

capital = mobile, scarce + sensitive

efficient allocation promotes economic growth, while inefficient allocation can constrain economic growth - bc of this, capital is selective + tends to flow toward attractive economic environments

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9
Q

what variables make capital flow into and out of countries

A
  1. the political environment
  2. economic trends
  3. fiscal policy
  4. monetary policy
  5. investment opportunities + risk-return opportunities
  6. labour force characteristics
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10
Q

why is the availability of capital important to a nation?

A

capital it necessary to promote economic output, improve productivity, encourage innovations, and improve the competitive position of a nation in general

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11
Q

define retail in the context of investors

A

investors who invest for their own account

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12
Q

define institutional in the context of investors

A

organizations that buy + sell securities on behalf of the underlying entity –> set up to serve its plan members

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13
Q

who represents a significant source of investment capital in Canada?

A

individual investors

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14
Q

corporation tend to retain a large portion of their earning to finance operations + growth and are not important source of capital

A
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15
Q

why is foreign investment important in canada?

A

necessary to fund deficits + growth

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16
Q

benefits vs cons of foreign investment

A

pros: helps to expand our international trading relationship

cons: may take long-term cash flows out of the country

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17
Q

what are the 2 types of international bond issues?

A
  1. foreign bonds: which are offered + denominated in the currency of a country other than the borrower
  2. eurobonds: which may be denominated in 1 or several currencies and are sold in countries other than the currency in which they are denominated
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18
Q

who are the users of capital

A

individuals, businesses, government

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19
Q

why do individuals use capital

A

primarily for consumption purposes, with the funds usually being obtained through personal loans, mortgage loans, or charge accounts

20
Q

why do businesses use capital?

A

use capital to finance day-to-day operations, to maintain _ upgrade plant = equipment, and to finance growth. funds are financied internally, remainder coming from bank loans + through the issue of securities (money market, bond, equity instruments)

21
Q

why do government use capital?

A

borrow to finance their expenditures

22
Q

how does the federal government finance debt?

A
  1. treasury bills
  2. marketable short + long-term bonds (debentures
  3. Canada Saving bonds + canada premium bond - only purchased by canadian residents
23
Q

what’s the use of financial instruments

A

enable the transfer of capital from suppliers to users

24
Q

what are the categories of financial instruments

A
  1. debt
  2. equity
  3. investment funds
  4. derivative products
  5. other investment products
  6. private equity
25
Q

define debt

A

represents a legal obligation to repay borrowed funds at a specified maturity ate + provide interim interest payments as specified in the agreemtn

26
Q

define equity

A

represents part-ownership of a company

27
Q

common vs preferred shareholders

A

common - provide holders with voting privileges _ may receive dividends

preferred - receive a fixed dividend amount that must be paid before any dividends are paid to common shareholders

28
Q

define investment funds

A

a company that manages investments for its client - most common is the open-end fund (mutual fund)

29
Q

define derivative products

A

derivatives derive their value from the price of another underlying assets - suitable for hedging or speculative purposes

30
Q

define other investment products

A

income trusts + exchanged-traded funds = recent innovations that have become very popular investments

31
Q

define private equity

A

financing can be equity or debt or a combination from a private side

higher risk ==> higher return for providers

lower liquidity than typical investments

32
Q

types of private equity

A
  1. leveraged buyouts
  2. growth capital
  3. early stage venture capital
  4. late stage VC
  5. distressed debt
33
Q

who are the typical providers of private equity

A

pension plans, endowments, foundations, wealthy individuals/families

34
Q

what are the pros of an efficient market

A

fast + low-cost transactions
maintain a high degree of liquidity

35
Q

define primary markets

A

sale of securities by the issue to the market for the first time, _ money flows to the issuers - in the form of IPOs or season offerings

36
Q

define secondary markets

A

involve the sale of previously issued securities - no funds go to the issuer - secondary markets facilitate the primary markets by making securities transferable

37
Q

how do finanical intermediaries improve the efficiency of markets

A

facilitate the trading or movement of the financial instruments that transfer capital between suppliers + users

38
Q

define auction markets

A

Market where all transactions converge to 1 location

39
Q

who are exchanges governed?

A

by bodies that consist of at least 1 permanent exchange official plus members of the BOD who are selected from member firms + 2-6 highly qualified public governors appointed or elected from outside the brokerage community

40
Q

how are exchanges financed?

A

by transaction fees, initial listing fees, sustaining listing fees, fees paid by companies with respect to capital structure changes + through the sale of historic + market information

41
Q

define dealer markets or over the counter markets

A

comprise a network of dealer that trade directly with each other over the phone or through a computer network - they are negotiated netowrks which maintain bid + ask quotationes received from the dealers acting as market makers in given seucirities

42
Q

define alternative trading systems

A

computerized systems that execute orders outside traditional exchange facilities by matching order from their own inventory or by matching buy and sell orders from outside parties - may permit buyers = sellers to contact each other directly to negotiate trades

these systems are privately owned, often by individual brokerage firms or groups of firms

most customers are institutional investors who are able to reduce their transaction costs

ideal for trading of securities on a global basis

43
Q

where are most bonds + debentures sold through which market?

A

dealer market

44
Q

what are the concerns over the Alternative trading system

A

trades are not available to the general public, threat of technological problems, issues from trading across country border

45
Q

what are the 3 electronic trading system

A

CanDeal, CBID, CanPX

AFM 121 (11 decks)

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