Finance 1 Flashcards
what are the two main things the existence of financial markets allow
- inter-temporal exchange
- exchange of risk
what are the 5 main categories of financial markets
- the stock market
- the bond market
- the money market
- the foreign exchange market
- the hedging market
what is the primary function of the stock market
- to raise permanent capital in the form of new shares being sold to equity investors
- whether in an IPO or an SEO
what differentiates a treasury bill, note and bond
- the time to maturity of the bond
- if the time to maturity is short-term like less than 1 year, its a bill
- if the time to maturity is medium-term between 1 to 10 years, its a note
- if the time to maturity is long-term like over 10 years, its a bond
what is the money market
- the money market is a market for debt securities that will pay off in the very short-term
- usually overnight or a couple of days
- they are comprised of a series of closely connected wholesale OTC short-term financial markets
what is the forex market
- the forex market is where foreign exchange currencies are bought and sold
- its a market for the exchange of purchasing power from one currency to another
what is the hedging market mainly used for
- the hedging market is mainly used for the management of risk
- like buying and selling of risk through derivatives products
- such as options, futures and forwards
what is the difference between a primary and secondary market
- primary markets are where governments and corps initially sell securities or do an IPO
- secondary markets are where they are traded from one investor to another (after debt and equity securities are originally sold)
what is the first principle of finance
- the time value of money
- the fact that “a pound today is worth more than a pound tomorrow”
- because you can invest the pound today and start earning interest immediately
what is the generic formula for future value, FV
- FV = C*(1+r)^t
- C = cash flow
- r = interest rate
- t = time
what is the generic formula for the present value, PV
- PV = C / (1+r)^t
- RHS = the discount factor
what is perpetuity and what is the formula for the PV of a perpetuity
- perpetuity is a constant stream of payments
- PV = C_1 / r
- C_1 = cash flow in the next period
- r = discount rate
what is the formula for the PV of a growing perpetuity
- PV of a growing perpetuity = C_1 / (r-g)
- g = growth rate
what is an annuity
- an annuity is a level stream of regular payments that lasts for a fixed number of periods
what is the formula for the PV of an annuity
- PV of an annuity = C*(1/r - 1/r(1+r)^t)