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FIN3703 > Financial Assets > Flashcards

Financial Assets Flashcards

1
Q

What is Finance?

A
  1. Transfer funds from surplus spending units to deficit spending units (from those who have funds to those who need funds)
  2. Reallocation of scarce resources from non-productive to productive uses
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2
Q

Example of Non-Productive Uses

A

Keeping cash in tins instead of depositing in the banks.

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3
Q

What is a Credit Cycle?

A
  1. Put cash in banks
  2. Bank can issue loans and funds for people who need it (e.g. startups that need funding)
  3. Business grow
  4. Employees wages grow
  5. Employees increase their consumption
  6. Goes back to point 1
    * In simple terms, for more info, visit https://www.investopedia.com/terms/c/credit-cycle.asp
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4
Q

What are Financial Assets?

A
  • Any possession that has value in exchange.
  • > Able to be resold.
  • > Able to provide cash flows
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5
Q

What are some examples of Tangible Assets?

A

Value of assets is based on physical properties.

  • Land
  • Buildings
  • Machinery
  • Vehicles
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6
Q

What are some examples of Intangible Assets?

A

Legal claims to future benefits.

  • Stocks
  • Bonds
  • Derivative Instruments (Value is derived from the underlying financial assets, they themselves has no value)
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7
Q

What are some examples of future benefits for intangible assets?

A
  • Stocks: Dividends/ Whatever is left of the company if it goes bankrupt
  • Bonds: Coupons + Par Value of the Coupon
  • Derivative Instruments: Options and Futures
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8
Q

Roles of Financial Assets?

A
  1. Helps in transfer of funds from surplus spending units to deficit spending units (non-productive to productive uses)
  2. Efficient pooling of funds (e.g. issue bonds and stocks to increase funds)
  3. Efficient distribution of ownership (e.g. issuing stocks)
  4. Management of risk
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9
Q

Types of Financial Assets (Debt/liabilities)

A

Fixed payments (periodically)

  1. Bank Loans
  2. Government bonds (T-bill; T-bonds)
  3. Corporate bonds (Coupons, par value)
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10
Q

Types of Financial Assets (Equity)

A

Payments are based on earnings (Not fixed)
e.g. Company have no obligation to give dividends based on their retained earnings

  1. Common Stock
  2. Preferred Stock
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11
Q

Money or near money (Properties of Financial Assets)

A

How easy the financial asset can convert into money.

Near money (quasi-money): Can be converted easily + quickly to cash.

  • Saving deposits
  • Fixed deposits
  • Negotiable Certificate of Deposit (NCD)
  • Debit cards
  • Cashless payments
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12
Q

What is M1 and M2 under MAS definition?

A 
M1 = Currency in active circulation
M2 = M1 + near money
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13
Q

What is a Negotiable Certificate of Deposit?

A

A certificate of deposit (CD) with a minimum face value of $100,000, though NCDs are typically $1 million or more.

An NCD is short term, with maturities ranging from two weeks to one year. Interest is paid, usually either twice a year or at maturity, or the instrument is purchased at a discount to its face value. Interest rates are negotiable, and yield from an NCD is dependent on money market conditions.

  • Does not mean terms & conditions are negotiable
  • Only ownership can be tradable/sellable/transferrable

LOW RISK BUT: Generally considered riskier as compared to T-bills, because the chances of a bank failing are greater than that of insurrection in the U.S. government ranks. As such, i/r for NCDs > i/r for Treasury bills.

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14
Q

Divisibility (Properties of Financial Assets)

A

Minimum size for liquidation or exchange for money.

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15
Q

What are infinitely divisible assets?

A

Deposits. (up to 2 dp)

$2.147947384……THEREFORE, it is (ALMOST) infinitely divisible.

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16
Q

Why do investors buy lots of shares?

A
  • Easier
  • Cheaper
    Therefore, more people buy and sell due to the convenience –> Increase liquidity.
17
Q

Why did the lots of shares reduce from 1,000 to 100 in Jan 2015 in Singapore?

A
  • Increase participation to trade
  • Increase trading volume/liquidity
  • Increase efficiency in financial markets
18
Q

What is the minimum size of liquidation (to buy and sell) for T-bills and bonds?

A

$1,000

19
Q

Reversibility (Properties of Financial Assets)

A

Round trip cost. (Transactional cost)

Cost of getting in and out.
Increases price of asset

  • Reflects liquidity
    e. g. bid-ask spread; commission or brokerage fee; stamp fee/duty (pay taxes to the government to allow trading); loadings
20
Q

What is a bid-ask spread?

A

Difference between the price where the market (or market maker) is willing to buy and sell.

e.g. Foreign exchange market - money changer

21
Q

How to tell the risk from a bid-ask spread?

A

High risk: Wider spread - Bracket surrounding the true price increases + returns are higher (allow the investor to protect themselves from the high risk)
Low risk: Narrower spread

  • If the risk is too high, people stop making the market
  • Their risk tolerance is maxed out (They are only willing to endure so much)
22
Q

What are Loadings?

A

A sales charge to an investor when buying
or
commission charged when redeeming shares in a mutual fund.

For example, if you invested $1,000 into a 5% load mutual fund, you would actually be investing only $950, with the remaining $50 going to the sales intermediary, such as a broker, financial planner, or investment advisor, for his time and expertise in selecting an appropriate fund for the investor [COMMISSION].

There are different types of load an investor may encounter:

  • Front-end loads (Class A shares), is a single charge paid by the investor when they purchase shares of the fund (buy into the fund).
  • Back-end load (Class B shares) charge a one-time fee paid when you redeem or sell, your mutual fund shares (when you liquidate).
  • Level load funds (Class C shares), are yearly charges and will be a fixed percentage taken from the fund’s assets.
23
Q

Liquidity (Properties of Financial Assets)

A

How fast the assets liquidate/sell

24
Q

What affects liquidity?

A
  • Number of ready buyers and sellers

Large group = high liquidity

25
Q

What happens if want to liquidate immediately?

A

Offer discount so that there are ready buyers.

26
Q

How does liquidity affect the bid-ask spread?

A

Low liquidity –> bid-ask spread is wide (high risk due to low trading volume)
High liquidity –> bid-ask spread is narrower (low risk due to high trading volume)

27
Q

Currency (Properties of Financial Assets)

A

Can be in the form of different currencies.

- There is exchange rate exposure and risk.

28
Q

Risk (Properties of Financial Assets)

A 
The assumption of uncertainty. 
Example: 
- Variance
- S.d
- Beta

Calculating price risk of the value of money
Note: Risk-free assets are risky as well.

29
Q

Term to maturity (Properties of Financial Assets)

A

Time Interval to final payment.

e.g. Bonds cease from existence when it matures

30
Q

What is the term to maturity for demand instruments?

A

0.

Payment can be done anytime.

31
Q

What are some examples of demand instruments?

A

Checking (demand)

Savings account deposits

32
Q

What financial assets have infinite time to maturity?

A
  • Perpetuities (Do not get principal value back)
  • Consol
  • Equities (Will last as long as the company does not go bankrupts and dissipates)
33
Q

Some examples of short-term financial assets?

A

T-bills

- Short-term government borrowings/bonds

34
Q

Some examples of long-term financial assets?

A

Bonds:

  • T-notes
  • T-bonds
35
Q

What are consols?

A

Fixed-income security with no maturity date. This type of bond is often considered a type of equity, rather than debt.

  • They pay a steady stream of interest payments (coupons) forever and regularly.
  • Government perpetual bonds.
36
Q

What are checking accounts (Demand instruments)?

A

A deposit account opened at a financial institution (banks) that allows withdrawals and deposits.

  • Very liquid
  • Can be accessed using checks, automated teller machines, and electronic debits, among other methods.

Differs from other bank accounts in that it often allows for numerous withdrawals and unlimited deposits, whereas savings accounts sometimes limit both.

FIN3703 (12 decks)

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