Financial Management Environment (1)

Question 1

What is financial intermediation?

Answer 1

Taking money from those who deposit and those who want to borrow

Question 2

What is aggregation?

Answer 2

Lots of money deposited from many people, allow them to lend big amounts to companies

Question 3

What is maturity transformation?

Answer 3

Individuals deposit money for relatively short periods, but bank can transform this into longer-term loans to companies

Question 4

What is diversification of risk?

Answer 4

Individuals afraid of lending money to one particular company. Banks lend individuals money to many places therefore reduces risk

Question 5

How do companies raise money?

Answer 5

Through issuing shares

Question 6

Purpose of the stock exchange?

Answer 6

A way of selling shares to shareholders. If I don’t want shares, sell them to someone else through stock exchange

Question 7

Who fixes the share price in stock exchange?

Answer 7

The dealer

Question 8

Why do share prices change?

Answer 8

Dealer buys shares and sells them to people who want to buy. Dealer must match the two concepts for the best possible results

Question 9

A successful dealer?

Answer 9

Raises and lowers prices for the best possible supply and demand

Question 10

Bull market?

Answer 10

When share price is increasing

Question 11

Bear market?

Answer 11

When share price is decreasing

Question 12

What is financial market efficiency?

Answer 12

How do they think the company is doing

Question 13

If companies shares are doing well?

Answer 13

Pay high price

Question 14

If companies shares aren’t doing well?

Answer 14

Pay low price

Question 15

Efficient market hypothesis?

Answer 15

How realistic share prices are depends on how much info is available to investors

Question 16

Strong-form efficiency?

Answer 16

Shareholders have all information available to company and have the perfect share price

Question 17

Weak-form efficiency?

Answer 17

Only have what the share price is in the past. No clue how it will do in the future

Question 18

Semi-strong efficiency?

Answer 18

Share prices are fixed by shareholders but ivnestors have all information publicly available

Question 19

Examples of semi-strong?

Answer 19

Stock markets

Question 20

A high interest charged by a bank?

Answer 20

I am perceived as more risky

Question 21

The more years I borrow money (interest rates)?

Answer 21

The interest rates will increase

Question 22

THe more I borrow interest rates (amount)

Answer 22

The more there is, the more interest charged

Question 23

Y axis and X axis on the yield curves?

Answer 23

Y axis: Yield
X axis: Years to maturity

Question 24

The shape of the yield curve?

Answer 24

Determines the likely movements in the interest rate

Question 25

Assumption in the yield curve?

Answer 25

The more years to maturity, the more the yield increases

Question 26

Shape of yield curve theories

Answer 26

Expectations theory
Liquidity preference theory
Segmentation theory

Question 27

What is expectations theory?

Answer 27

If interest rates expected to increase, curve curves upward and vice versa. Curves goes flat if prices are the same

Question 28

What is liquidations preference theory?

Answer 28

Yields will rise when investing for a longer period

Question 29

What is segmentation theory?

Answer 29

Different investors are interest in different segments of the yield curve. Curve’s results are based on these reactions