Exam Focus Flashcards
(13 cards)
What is the difference between public and private financial markets?
Public markets are open and regulated (e.g. stock exchanges), while private markets involve restricted, negotiated deals with less liquidity and oversight.
Name three key functions of financial markets or instruments.
- Capital raising, 2. Liquidity and price discovery, 3. Risk management.
What is the difference between the primary and secondary market?
Primary market is for new securities issued by firms. Secondary market is for trading existing securities among investors.
What is discounting and how does it work?
Discounting reduces future cash flows to present value using a discount rate. The further in the future, the lower the present value.
What is the difference between a discount rate and a discount factor?
Discount rate is the required return; discount factor is 1/(1+r)^n, used to calculate present value.
How does a constant discount rate lead to varying discount factors over time?
With 1/(1+r)^n, as n increases, the factor decreases, lowering the present value of future payments.
What is the likely impact of rising interest rates on asset prices?
Rising rates lower the present value of future cash flows, reducing asset prices and discouraging borrowing.
List the basic features of a bond.
Face value, coupon rate, maturity date, market price, yield to maturity.
Who are the key participants in the public bond market?
Issuers (governments, firms), investors (funds, banks), intermediaries (brokers, rating agencies).
How do you price a 3-year bond with 4% coupon and 2.5% yield?
Price = 4/(1.025)^1 + 4/(1.025)^2 + 104/(1.025)^3 ≈ €104.29.
What is the difference between current yield and yield to maturity?
Current yield = coupon/price. YTM includes total return from coupons and capital gain/loss to maturity.
What does a widening yield spread indicate?
Higher perceived credit risk or market uncertainty.
Why might an inverted yield curve arise?
Due to expectations of recession, falling future rates, or tight short-term monetary policy.
