Chapter 1 - financial overview

Question 1

financial markets are crucial for

Answer 1

producting an efficient allocation of capital

Question 2

higher liquidity….

Answer 2

makes it easier for the issuing firm to sell in the primary market

Question 3

Saving may also be channelled to financial intermediaries through

Answer 3

financial markets, or to financial markets through financial intermediaries

Question 4

flows of funds in a firm

Answer 4

Savers – financial markets or intermediaries– financial officer — firms’ operations

Question 5

§FINANCIAL RELATIONS between EAS and EAD:

Answer 5

§They are implemented through financial assets (FA) –issued by EAD; primary-
§They are channelled through the financial markets (FM)

§They are provided by financial institutions (FI)

Question 6

A FS can be studied from three points of view:

Answer 6

Financial Institutions
nFinancial instruments (FA and monetary policy measures)
nFinancial Markets

Question 7

REASONS FOR THE EXISTENCE OF A FS

Answer 7

Savers and investors preferences do not match:

*RETURN
*RISK
*LIQUIDITY

Question 8

financial system

1st reason MEDIATION FUNCTION (direct financing)

Answer 8

Contact of grantees and funding applicants
Mediators (brokers and dealers) and financial intermediaries (banks,…)

Question 9

2nd Reason INTERMEDIATION FUNCTION (transformation, indirect financing)

Answer 9

To transform the primary FA issued by EAD in secondary FA more in line with the preferences
of the majority of savers
Financial intermediaries (banks, investment funds, pension funds, insurance companies..)

Question 10

Financial System: Mediation and intermediation functions… HOW DOES IT ACTUALLY WORKS?

Answer 10

??

Question 11

Financial System Efficiency

Answer 11

Larger Efficiency of a Financial System: the more saving and in better conditions for economic agents it
is able to capture and channel towards productive investment
With this aim, the Financial System should articulate the necessary mechanisms to bring together
savers and investors and adapt to the preferences of both groups of agents

Question 12

THE CAPTURE AND CHANNELLING OF SAVINGS must be done within a

Answer 12

stable framework (from a
monetary, financial and political point of view) Þ every FA is subject to regulation and supervision by
the economic, monetary and financial authorities with a dual objective:

Question 13

Stability of the FA

Answer 13

in order to ensure the proper functioning of markets and to monitor the
solvency of financial institutions

Question 14

Protection of financial services consumers,

Answer 14

especially those most in need of such protection by
not having the resources and knowledge (CNMV –SEC-)

Question 15

A financial asset is a

Answer 15

title ,or simply an accounting annotation, whereby the purchaser acquires the
right to receive a part of seller’s future income

or

Means or instruments used to perform the transfer of financial resources from an economic agent
(EAS) to another (EAD), constituting the material aspect of a financial flow normally.

Question 16

“A financial asset is an asset and a

Answer 16

liability at the same time”

Question 17

It is both a way of keeping wealth for their owners, and a

Answer 17

a liability or debt to the economic units
that generate it

Question 18

Functions of FA

Answer 18

Instrument of transfer of FUNDS
*From the acquirer to the issuer

b) Instrument of transfer of RISKS (depends on the type of FA)
*Issuer’s INSOLVENCY risk
*TO BUY A FA implies to assume part of the risk of the investment that the transferred funds will finance

Question 19

characteristic

Answer 19

a) Return

b) Risk

c) Liquidity

Question 20

!Degree of relative liquidity (more to less liquidity)!

Answer 20

a) Currency: coins and legal tender banknotes
b) Deposits (current accounts)
c) Savings Deposits (savings accounts)
d) Term Deposits (Fixed-term deposits)
e) Short-term Public Debt: Treasury Bills
f) Commercial paper
g) Medium and long-term Public Debt:
medium term: State Bonds (maturity: 3 to 5 years)
long term: State Bonds (maturity: 10, 15, 30 and 50 years)
h) Medium and long-term corporate debt
i) Shares:
Shares traded on the Stock Exchange
Non-listed shares

Question 21

Financial Markets:definition

Answer 21

Set of mechanisms (procedures) or space in which the trading of financial instruments
among economic agents is undertaken and the prices of FA are determined.

Question 22

Functions of FM

Answer 22

1. Facilitate the contact between investors and providers of funds
2. Determine the price of financial assets
3. Provide liquidity to financial assets
4. Reduce transaction costs ® costs associated to financial assets’ negotiation

Question 23

CHARACTERISTICS OF FM

Answer 23

a) Breadth
b) Transparency
c) Freedom
d) Depth
e) Flexibility

Question 24

CLASSIFICATION

Question 25

FA. Classification: 1. According to the issuer

Answer 25

a) ECB-EUROSYSTEM: it issues the legal tender banknotes b) Public Treasury: it issues the coins and all the public debt securities (Treasury Bills, Bonds) c) Banks: they issue deposits of any kind; they also issue fixed-income securities and equity d) Non-financial firms: they issue, when being joint-stock companies, equity; they may also commercial paper (short-term fixed-income securities); and any medium and long-term fixed income security (bonds)

Question 26

1.5.- Functions and classification of Financial Intermediaries: indirect financing

Answer 26

Set of institutions specialized in the mediation between lenders and borrowers of the economy and the transformation of financial assets

Question 27

BASIC ACTIVITY’S AXIS

Answer 27

To lend and borrow funds

Question 28

FUNCTIONS

Answer 28

MEDIATION INTERMEDIATION OR TRANSFORMATION

Question 29

How do they transform FA?

Answer 29

They buy primary FA as an investment and on the basis of those FA they issue (create) secondary FA (e.g. current accounts, term deposits, insurance policies, bonds) that are sold to savers

Question 30

Advantages of financial intermediaries

Answer 30

At a general level, you can say that these advantages derive from the existence of economies of scale, i.e. to operate with large amounts of funds. 1 Reduce the cost of collecting information 2 Diversification of risks 3 Staggered maturities of its operations 4. When granting financing, they manage higher quantities of funds 5. When transforming primary FA into secondary FA, they incorporate their solvency to the latter

Question 31

Dealers:

Answer 31

financial agents who operate on their own account, i.e., buy and sell financial assets on their own account They do not create new FA (do not transform FA), but they do assume risks Example: Securities firms (Sociedades de Valores)

Question 32

Brokers:

Answer 32

financial agents that operate on behalf of others and are involved in the process of channelling the savings towards investment by putting in contact applicants and suppliers of funds in exchange of charging a commission Individual or firm which acts as an intermediary between a buyer and seller, usually charging a commission. Classification: Brokers, dealers and financial intermediaries They do not create new FA (they do not transform FA) and do not assume risks in their financial operations Example: Securities Broker (Agencias de Valores)

Question 33

Financial Intermediaries:

Answer 33

may act as brokers (on behalf of others) and dealers (on their own account) Main characteristic: they transform FA (and create new FA) Example: Banks, insurance companies, mutual funds, pension funds....

Question 34

Classification of financial intermediaries

Answer 34

A) MONETARY FINANCIAL INTERMEDIARIES (banking) B) NON-MONETARY FINANCIAL INTERMEDIARIES (non-banking)

Question 35

A) MONETARY FINANCIAL INTERMEDIARIES (banking)

Answer 35

1.Bank of Spain 2.Other monetary financial institutions (banking system) 2.1. Banks 2.2. Savings Banks 2.3. Cooperative Credit Societies

Question 36

B) NON-MONETARY FINANCIAL INTERMEDIARIES (non-banking)

Answer 36

1. Credit Finance Entities 2. Collective Investment Institutions: Investment Societies and Funds 3. Insurance companies and pension funds