lecture 1

Question 1

what are financial markets

Answer 1

markets where funds transferred

typically stock exchange

Question 2

what role does financial markets play in the economy

Answer 2

provide info

allow for transfer of consumption timings

allocation of risk

Question 3

what is direct financing

Answer 3

borrow fund directly from lender

assets to the buyer buy liabilities to the seller

Question 4

what is indirect financing

Answer 4

use of financial intermediaries to help with financing such as car loans

Question 5

what do financial intermediaries do

Answer 5

they bring together borrowers and lenders

Question 6

what to economies of scale allow for

Answer 6

efficiencies in gathering info

transaction costs

Question 7

what are the types of intermediaries

Answer 7

• Building soc
  
  • Retail banking
  • Investment banking
  • Finance houses
  • Pension funds
  • Insurance comp
    
    • Investment pool vehicles

Question 8

what are the type of investment pool vehicles

Answer 8

unit trusts
investment trusts
exchange traded funds (ETFS)
hedge funds

Question 9

what are hedge funds

Answer 9

attempt to generate positive investment based on skill

only for the wealthy

very risks as based on market

Question 10

what are exchange traded funds (ETFS)

Answer 10

set up as a company issuing shares

used to buy a collection of shares

open ended but trade like stock

Question 11

what are investment trusts

Answer 11

tradable

invest in range of assets

price set by market
priced at premium sold at discount discount NAV puzzle

Question 12

what are unit trusts

Answer 12

open ended funs units are brough and sold by fund managers

no limit
not traded on open market
priced at net asset value
divided into active and passive trackers

Question 13

what is the net asset value formula

Answer 13

market value - liabilities / number of units

Question 14

what is fintech

Answer 14

the application of tech in financial markets

Question 15

what has fintech done

Answer 15

helped with disintermediation

allowed individuals to interact directly

Question 16

what are the categories of financial markets

Answer 16

primary
secondary
exchanges
over the counter
debt markets
share equity markets
foreign exchange markets
derivative markets
money markets
capital markets

Question 17

what are primary markets

Answer 17

• New issues of a security sold to initial buyers
• Not well known to the public
  Financial institutions which assist are investment banks

Question 18

what are secondary markets

Answer 18

• Securities previously issued can be resold
  
  • LSE
  • NYSE
  • Specialists
    ○ Brokers - agents of investors that match buyers and sellers don not hold portfolios
    Dealers - link buyers and sellers, hold a portfolio of securities

Question 19

what are exchange markets

Answer 19

Organised markets that provide physical meeting places and communication

Question 20

what is over the counter markets

Answer 20

Market with no central location

Question 21

what are capital markets

Answer 21

include longer term and riskier securities

Question 22

what are money markets

Answer 22

short term

Question 23

what is common to money markets

Answer 23

• Large denominations
  
  • Low default risk
  • Short maturities

Question 24

what are certificates of deposit

Answer 24

• Bank pays interest and principal at maturity
  
  • Cannot be withdrawn
    Sold on second markets

Question 25

treasury bills

Answer 25

- Used by government - Traded Investors buy the bills at discount from FV and earnings are the difference

Question 26

what are commercial bill

Answer 26

Same as treasury bill but for companies

Question 27

what are banker acceptance

Answer 27

- Firm issues doc that states bank will make payments in the future - Like a bill but the bank promises to pay - Less risky Smaller rates

Question 28

what are bills of exchange

Answer 28

a written order binding one party to pay a fixed sum of money

Question 29

what are sale and repurchase agreement

Answer 29

Securities are sold for cash with the promise to buy those back in future at higher price The interest is the difference

Question 30

what is LIBOR

Answer 30

London Interbank Offer Rate the premier short-term interest rate quoted in the European money market Vulnerable to manipulation 2012

Question 31

what is SONIA

Answer 31

Sterling Overnight Index Average (managed by BoE average of previous day transactions)-SOFR equivalent US

Question 32

what is the stock exchange

Answer 32

Organised markets where government and industry can raise capital Investors can buy and sell securities

Question 33

how many countries are officially recognised

Answer 33

140

Question 34

what is the LSE

Answer 34

Started in 18th century No physical trading floor anymore Both primary and secondary market

Question 35

what is the main market of the LSE

Answer 35

- 25% of shares in public hands. Loss of some privacy and autonomy, e.g. greater disclosure of directors’ remuneration.

Question 36

what does AIM stand for

Answer 36

Alternative investment market

Question 37

what is the price at which the dealer buys on the exchange

Answer 37

the bid price

Question 38

what is the price at which a dealer sells called

Answer 38

the ask price

Question 39

what is the spread (exchange market)

Answer 39

difference between the bid and ask price

Question 40

what is the tick size (exchanges)

Answer 40

minimum price movement allowed 0.1p in the UK

Question 41

what is a limit order

Answer 41

buy or sell orders that are to be executed at a specified prices

Question 42

what are market orders

Answer 42

buy or sell orders that are to be executed immediately at current market prices

Question 43

what are clearing houses

Answer 43

a counterparty- eliminates default risk complete the transaction - settlement To ensure the buyer has funds for the trade investors set margin accounts with their brokers