Week 8.2- Capital Markets and Bond Pricing

Question 1

Describe money markets

Answer 1

The markets for shorter term finance, typically of a year or less

Question 2

Describe capital markets

Answer 2

Markets for longer term finance, typically longer than a year

Question 3

What is the primary purpose of all stock exchanges?

Answer 3

To raise equity capital for firms in return for securities issued in the form of ordinary shares or preference shares

Question 4

Describe ordinary shareholders

Answer 4

• Usually paid dividends out of any residual profit
• Usually have voting rights, though this is not always the case

Question 5

Describe preference shares

Answer 5

• Less common than ordinary shares
• Dividends which is fixed percentage of the value of their share subscription
• Unpaid dividends accrues until it can be paid
• Do not usually have voting rights unless dividends fall into arrears
• More like debt in their characteristics
• In the event of liquidation, they have precedence over ordinary shares

Question 6

Describe a bond

Answer 6

Defined by face value, maturity and coupon rate

Question 7

What is face value?

Answer 7

The denomination of the bonds, i.e. the units in which it’s transacted

Question 8

What is bond interest?

Answer 8

The coupon, a fixed % of face value

Question 9

What is bullet repayement?

Answer 9

All of the sum borrowed is repaid at maturity

Question 10

How do you find the value of any financial asset?

Answer 10

The sum of discounted cash flow.

Value = Price = Sum of discounted cash flow

Divide each cash flow by the appropriate interest multiple