p.35
Types of Financial Instruments
What are money market instruments?
Financial instruments used for short-term borrowing and lending, typically with maturities of one year or less.
p.1
Purpose of Financial Markets
What is the significance of the date 8/19/2024?
It appears to be a reference date, possibly for a lecture or assignment.
p.2
Participants in Financial Markets
Who participates in financial markets?
Participants include individual investors, institutions, governments, and corporations.
p.47
Types of Financial Instruments
What do stockholders own in a corporation?
A percentage interest in the firm, consistent with the percentage of outstanding stock held.
What do financial instruments represent?
A written legal obligation of one party to transfer something of value, usually money, to another party at a future date under specified conditions.
p.19
Types of Financial Instruments
What are equity-based managed products?
Professionally managed funds.
p.20
Types of Financial Markets
What is the primary role of the stock exchange in relation to derivatives?
It provides a market for trading equity-related derivative products.
p.23
Role of Stock Exchanges
What determines the reflection of information in share prices?
The speed at which new information flows to the market and is absorbed.
p.9
Participants in Financial Markets
Who are the main participants in financial markets?
Individuals, institutions, and governments.
p.35
Purpose of Financial Markets
What is the primary purpose of money market instruments?
To provide liquidity and funding for short-term needs.
p.9
Participants in Financial Markets
What role do individuals play in financial markets?
They invest and save through various financial instruments.
p.4
Purpose of Financial Markets
What is the flow of funds relationship in financial markets?
It represents the core features of the financial system without complexity.
p.25
Why do different financial institutions exist?
What factors influence the demand for funds in financial markets?
Current and future needs, length of fund usage, scale of funds needed, and risk of funded projects.
p.23
Role of Stock Exchanges
What should current share prices reflect?
All information available in the market.
p.50
Participants in Financial Markets
Who manages the day-to-day affairs of a corporation?
Owners (shareholders) do not affect the day-to-day affairs.
p.56
Types of Financial Instruments
How do futures contracts compare to forward contracts?
Futures contracts are similar to forward contracts but are standardized and traded on organized exchanges.
What does the number 46 represent in this context?
It is unclear without additional context.
p.32
Types of Financial Instruments
What is commercial paper?
A short-term debt instrument issued by large banks and well-known corporations.
p.50
Types of Financial Markets
How does a corporation differ from other business forms?
Ownership claims are widespread and easily transferable.
p.8
Money Market vs. Capital Market
What is an example of a short-term instrument in the money market?
Treasury bill or commercial paper.
p.12
Purpose of Financial Markets
What are financial markets?
Platforms where buyers and sellers trade financial assets.
p.13
Types of Financial Markets
What is a key characteristic of exchanges?
Buyers and sellers meet in one central location to conduct trades.
p.6
Debt vs. Equity Markets
What do equity instruments represent?
Claims to share in the net income and assets of a business.
p.53
Types of Financial Instruments
What is non-cumulative preferred stock?
A type of preferred stock that does not accumulate unpaid dividends.
p.16
Role of Stock Exchanges
What is the primary role of a stock exchange?
To facilitate the buying and selling of securities in the primary market.
p.55
Types of Financial Instruments
What is a forward contract?
A contract that obligates the holder to buy or sell a specified amount of a financial instrument for a predetermined price at a future date.
p.25
Why do different financial institutions exist?
What role does the scale of funds needed play in financial markets?
It influences the structure and types of financial markets available.
p.49
Types of Financial Instruments
What is an ordinary share?
The principal form of equity issued by a corporation, which bestows a claim to residual cash flows and ownership and voting rights.
p.16
Role of Stock Exchanges
What is the function of the secondary market in a stock exchange?
To enable the trading of previously issued securities.
p.13
Participants in Financial Markets
What role do dealers play in over-the-counter markets?
They link buyers and sellers by buying and selling securities at stated prices.
p.22
Types of Financial Markets
What systems are used for trading and settlement in Vietnam?
HOSE and HNX use Viet Nam Securities Depository and Clearing Corporation (VSCD).
p.27
Money Market vs. Capital Market
How do Treasury bills pay interest?
They are sold at a discount and do not make interest payments.
p.49
Types of Financial Instruments
What rights do ordinary shareholders possess?
Ownership and voting rights, along with a claim to residual cash flows.
p.41
Types of Financial Instruments
What do discount bonds promise to pay at maturity?
A single payment of cash.
p.42
Types of Financial Instruments
What is a callable bond?
A bond that gives the issuer the right to redeem it before the final maturity date.
p.17
Primary vs. Secondary Markets
What is an Initial Public Offering (IPO)?
The initial listing of a corporation on the stock exchange.
p.49
Types of Financial Markets
What is a share market?
A formal exchange facilitating the issue, buying, and selling of equity securities.
p.18
Secondary vs. Primary Markets
What is the primary role of the stock exchange in the secondary market?
To facilitate trading in existing shares.
p.34
Types of Financial Instruments
What must a firm do when issuing a banker's acceptance?
Deposit the required funds into its account to cover the draft.
p.17
Primary vs. Secondary Markets
What are placements in the context of stock exchanges?
The issue of new shares to selected institutional investors.
p.33
Participants in Financial Markets
What does a buyer do in a commercial paper transaction?
Purchases the commercial paper as an investment.
p.34
Types of Financial Instruments
What does the bank do to guarantee a banker's acceptance?
Stamps it 'accepted' for a fee.
p.27
Money Market vs. Capital Market
What is a Treasury bill?
A short-term debt instrument used to finance the government.
p.9
Participants in Financial Markets
What types of institutions are involved in financial markets?
Banks, insurance companies, mutual funds, and pension funds.
p.12
Types of Financial Markets
What types of assets are commonly traded in financial markets?
Stocks, bonds, currencies, and derivatives.
p.47
Types of Financial Instruments
How are dividends related to stockholders?
Stockholders are paid dividends from the net earnings of the corporation, usually every quarter.
p.56
Types of Financial Instruments
What is a key feature of futures contracts?
They standardize certain features of the contract.
p.53
Types of Financial Instruments
What is convertible preferred stock?
A type of preferred stock that can be converted into common stock.
p.31
Money Market vs. Capital Market
What type of financial instrument is a negotiable bank certificate of deposit?
A short-term debt instrument or time deposit.
p.6
Debt vs. Equity Markets
What is the maturity of a debt instrument?
The time from the issuing date to the instrument’s expiration date.
p.53
Types of Financial Instruments
What is cumulative preferred stock?
A type of preferred stock that accumulates unpaid dividends.
p.33
Participants in Financial Markets
What does a seller do in a commercial paper transaction?
Issues the commercial paper to raise funds.
p.3
Types of Financial Markets
What are financial markets?
Places where financial instruments are bought and sold.
p.50
Debt vs. Equity Markets
What is the liability of shareholders in a limited liability company?
Limited to the issue price of shares.
p.47
Types of Financial Instruments
What does 'residual claim' mean for stockholders?
Stockholders are the last in line to claim on the assets and income of the corporation.
p.6
Debt vs. Equity Markets
What is included in the balance sheet of issuers?
Liabilities and equities on one side, and assets on the other.
p.42
Types of Financial Instruments
What type of instruments do callable and convertible bonds belong to?
Capital market instruments.
p.19
Types of Financial Instruments
What are some examples of managed products?
Exchange traded funds (ETFs), real estate investment trusts (REITs), and infrastructure funds.
p.26
Financial Instruments
What are financial instruments?
Contracts that represent an asset to one party and a liability to another.
p.15
Role of Stock Exchanges
What is necessary for ensuring market integrity in a stock exchange?
Regulation and monitoring.
p.30
Participants in Financial Markets
How do banks manage their reserve positions?
By borrowing or investing in federal funds based on whether they have deficit or excess reserves.
p.26
Debt vs. Equity Markets
What is the difference between debt and equity?
Debt involves borrowing funds to be repaid with interest, while equity represents ownership in a company.
p.23
Role of Stock Exchanges
What does the appointment of a liquidator signify?
A significant change in a company's financial status.
p.13
Types of Financial Markets
What distinguishes exchanges from over-the-counter markets?
Exchanges have a central location for trading, while over-the-counter markets operate at different locations.
p.36
Debt vs. Equity Markets
What is trade credit?
A financing arrangement where a supplier provides goods or services with payment due at a later date.
p.45
Types of Financial Instruments
What do stocks represent in a corporation?
Equity claims on the net income and assets.
p.24
Participants in Financial Markets
What is the main stock exchange in Australia?
Australian Securities Exchange (ASX).
p.26
Financial Instruments
What are some sources of short-term debt instruments?
Federal Funds, Treasury bills, Negotiable bank certificates of deposit, Commercial paper.
p.2
Types of Financial Markets
What types of financial markets are there?
There are primary markets, secondary markets, money markets, and capital markets.
p.8
Money Market vs. Capital Market
What type of instruments are traded in the capital market?
Intermediate and long-term instruments.
p.23
Role of Stock Exchanges
What does investor confidence in exchanges rely on?
Informational efficiency.
p.29
Money Market vs. Capital Market
What is a repurchase agreement?
An agreement where the borrower sells securities to the lender and commits to repurchase them at a specified date and price.
p.42
Types of Financial Instruments
What is a convertible bond?
A bond that gives the holder the right to convert it into a pre-specified number of shares of common stock.
p.2
Why do different financial institutions exist?
Why do financial institutions exist?
To provide services such as lending, investment, and risk management.
p.47
Types of Financial Instruments
How do stockholders differ from bondholders?
Stockholders own a part of the corporation, while bondholders are creditors with no ownership interest.
p.25
Why do different financial institutions exist?
How does the length of fund usage affect financial markets?
It determines the type of financial instruments and markets that are utilized.
p.32
Types of Financial Instruments
What does commercial paper pay at maturity?
A set amount known as the face value.
p.15
Role of Stock Exchanges
What is one principal function of a modern stock exchange?
Provision of markets for a range of financial securities.
p.4
Participants in Financial Markets
Who are surplus units in financial markets?
Savers of funds available for lending.
p.30
Money Market vs. Capital Market
What are federal funds?
Short-term funds transferred between financial institutions, usually for one day.
p.53
Types of Financial Instruments
What is participating preferred stock?
A type of preferred stock that allows holders to participate in additional earnings.
p.33
Types of Financial Instruments
What is a promissory note?
An unconditional promise in writing to pay a specific amount to a beneficiary.
p.48
Types of Financial Instruments
How is the dividend policy for common stock determined?
It is subject to the company's dividend policy.
p.29
Financial Instruments
What is collateral in the context of a repurchase agreement?
An asset that the lender receives if the borrower does not pay back the loan.
What is market liquidity?
The ratio of share turnover to market capitalization.
p.43
Debt vs. Equity Markets
What do lenders attract when lending directly compared to intermediaries?
Higher yield due to sharing in the profit margin.
p.53
Types of Financial Instruments
What is callable preferred stock?
A type of preferred stock that can be redeemed by the issuer before its maturity.
p.41
Types of Financial Instruments
How is the interest earned by investors calculated for discount bonds?
Face value minus the purchase price.
p.6
Debt vs. Equity Markets
What are debt instruments?
Contractual agreements by borrowers to pay holders fixed amounts at regular intervals until maturity.
p.3
Purpose of Financial Markets
What is the primary reason financial markets exist?
To reallocate assets efficiently and support economic growth.
p.33
Types of Financial Instruments
What is commercial paper?
A money market instrument used for short-term financing.
p.56
Types of Financial Instruments
What are futures contracts?
Standardized agreements to buy or sell an asset at a certain time in the future for a certain price.
p.4
Purpose of Financial Markets
Why do financial markets exist?
To facilitate the interaction between surplus units (savers) and deficit units (borrowers).
p.29
Financial Instruments
What type of securities are typically involved in a repurchase agreement?
Usually Treasury bills (T-bills).
p.9
Participants in Financial Markets
What is the role of governments in financial markets?
They regulate markets and may also borrow funds.
p.12
Purpose of Financial Markets
What is the primary function of financial markets?
To facilitate the raising of capital, transfer of risk, and international trade.
p.24
Purpose of Financial Markets
What is the primary aim of regulation in financial markets?
To ensure market participants have confidence in the integrity of market operations.
p.19
Primary vs. Secondary Markets
How are units in equity-based managed products traded?
They are bought and sold on the stock exchange like shares in corporations.
p.29
Money Market vs. Capital Market
What is the typical maturity period for a repurchase agreement?
Normally less than two weeks.
p.11
Primary vs. Secondary Markets
What is the primary market?
A financial market where new issues of securities, like bonds or stocks, are sold to initial buyers.
p.4
Participants in Financial Markets
Who are deficit units in financial markets?
Borrowers of funds for capital investment and consumption.
p.30
Purpose of Financial Markets
What is the purpose of federal funds?
To meet minimum reserve requirements set by the Federal Reserve.
p.43
Financial Instruments
What type of securities are issued for longer-term debt?
Longer-term debt securities.
p.33
Types of Financial Instruments
What is a bill of exchange?
A written order for unconditional payment of a specified amount to a beneficiary.
p.37
Financial Instruments
What does the notation 2/10, n/30 mean?
A 2% discount if paid within 10 days, otherwise the full amount is due in 30 days.
p.14
Financial Instruments
What is a depository in the context of securities?
A place where securities are held.
p.22
Participants in Financial Markets
How are clients' orders executed?
Via computer from the broker's office, in order of time received and buy/sell price.
p.15
Types of Financial Markets
What is the Hanoi Stock Exchange (HNX)?
Another stock exchange in Vietnam.
p.45
Types of Financial Instruments
What is a share of stock in a firm?
It represents ownership in the corporation.
p.44
Types of Financial Instruments
What is a family issue?
Securities issued to existing shareholders and investors, by prospectus.
p.22
Types of Financial Markets
What does CHESS facilitate?
The settlement of transactions conducted through the exchanges.
p.2
Purpose of Financial Markets
Why do financial markets exist?
To facilitate the buying and selling of financial instruments and to allocate resources efficiently.
p.17
Primary vs. Secondary Markets
What is the primary role of a stock exchange?
To facilitate the efficient and orderly sale of new financial securities.
p.25
Why do different financial institutions exist?
What drives the existence of different financial markets?
The demand and supply for funds.
p.19
Role of Stock Exchanges
What role does the stock exchange play in managed products?
It provides a market for trading managed products.
p.17
Primary vs. Secondary Markets
What is a rights issue?
The issue of additional shares to existing shareholders on a pro-rata basis.
p.48
Types of Financial Instruments
What is a key characteristic of common stock?
No maturity and no refund.
p.8
Money Market vs. Capital Market
What is an example of a long-term instrument in the capital market?
Common stock or long-term bond.
p.49
Types of Financial Markets
What defines a publicly listed corporation?
A company whose shares are quoted and traded on a formal stock exchange.
p.2
Why do different financial institutions exist?
Why do different financial institutions exist?
To meet various financial needs and to manage different types of risks.
p.13
Participants in Financial Markets
Who are brokers in the context of financial markets?
Agents of investors who match buyers with sellers of securities.
p.8
Money Market vs. Capital Market
What distinguishes money markets from capital markets?
Money markets deal with short-term debt instruments, while capital markets deal with longer-term instruments.
p.32
Types of Financial Instruments
Does commercial paper have interest payments?
No, it does not have interest payments.
p.15
Role of Stock Exchanges
What system is essential for trading in a stock exchange?
Securities trading system.
p.39
Types of Financial Instruments
What is the coupon rate?
The interest rate applied to the face value of the bond.
p.13
Types of Financial Markets
How do over-the-counter markets operate?
Dealers at different locations buy and sell securities 'over the counter' to anyone willing to accept their prices.
p.39
Types of Financial Instruments
What is an example of a coupon bond?
A bond with a face value of $1,000 that makes annual coupon payments at a coupon rate of 10% for 10 years.
p.16
Role of Stock Exchanges
What is the purpose of the derivative market role in a stock exchange?
To facilitate trading in financial instruments derived from other assets.
p.26
Financial Instruments
What is considered a short-term financial instrument?
Instruments with a maturity of less than 12 months.
p.53
Capital Market vs. Money Market
What market instruments does preferred stock belong to?
Capital market instruments.
p.43
Financial Instruments
What is an unsecured note?
A bond with no underlying security attached.
p.20
Types of Financial Instruments
Name three types of derivatives traded on a stock exchange.
Options, warrants, and futures contracts.
p.55
Types of Financial Instruments
What are spot contracts?
Agreements to buy or sell an asset today.
p.11
Primary vs. Secondary Markets
What does an active secondary market indicate?
There are many willing buyers and sellers of the security at a given point in time.
p.22
Types of Financial Markets
What is the typical settlement period for transactions?
Within three days/two days.
p.58
Financial Instruments
What is a swap?
An arrangement by two counterparties to exchange one stream of cash flows for another.
p.34
Types of Financial Instruments
What is a banker's acceptance?
A bank draft issued by a firm, payable at a future date, and guaranteed by the bank.
p.9
Participants in Financial Markets
How do institutions participate in financial markets?
By managing funds, providing loans, and facilitating transactions.
p.15
Types of Financial Markets
When did the origins of the modern stock exchange begin?
In the mid-16th century England.
p.35
Participants in Financial Markets
Where can you find information about money market instruments?
On the Federal Reserve's H15 release page.
p.39
Types of Financial Instruments
What is a coupon bond?
A bond where the issuer promises to make periodic interest payments and pay the face value at maturity.
p.43
Types of Financial Markets
What market issues corporate bonds?
The corporate bond market.
p.39
Types of Financial Instruments
What are coupon payments?
Periodic interest payments made to the bondholder for the life of the bond.
p.50
Debt vs. Equity Markets
What is the liability of shareholders in a no-liability company?
Limited to any partly paid portion of shares.
p.37
Financial Instruments
What is trade credit?
A short-term financing option that allows buyers to purchase goods and pay for them later.
p.25
Why do different financial institutions exist?
Why is the risk of funded projects important in financial markets?
It affects the willingness of investors to provide funds and the types of financial instruments used.
p.23
Role of Stock Exchanges
What is an example of information disclosure related to financial forecasts?
A change in a company’s financial forecasts.
p.51
Why do different financial institutions exist?
What is one advantage of the corporate form?
Ability to obtain large amounts of finance at a relatively cheap cost.
p.12
Purpose of Financial Markets
What role do financial markets play in the economy?
They allocate resources efficiently and provide liquidity.
p.38
Debt vs. Equity Markets
What is par value or face value of a bond?
The amount that the issuer must pay at maturity.
p.23
Role of Stock Exchanges
What is a declaration of a dividend?
An announcement regarding the distribution of profits to shareholders.
p.55
Types of Financial Instruments
Where are forward contracts typically traded?
On the over-the-counter market.
p.52
Why do different financial institutions exist?
What is the 'agency problem'?
The conflict of interest between owners (principals) and managers (agents).
p.23
Role of Stock Exchanges
What does a notice of a takeover bid indicate?
An attempt to acquire control of a company.
p.16
Role of Stock Exchanges
What is the information role of a stock exchange?
To provide relevant market data and information to investors.
p.52
Why do different financial institutions exist?
What can investors do to moderate the conflict of interest between owners and managers?
Sell shares in a corporation, which can cause the share price to fall.
p.45
Participants in Financial Markets
What is the role of shareholders in a corporation?
They are residual claimants on the corporation's income and assets.
p.7
Debt vs. Equity Markets
What is equity?
Ownership interest in an asset.
p.26
Types of Financial Instruments
What are derivatives?
Financial instruments whose value is derived from an underlying asset.
p.36
Debt vs. Equity Markets
What are some disadvantages of trade credit for suppliers?
Costs of discount, increased total credit period, accounts receivable, and bad debt costs.
p.18
Secondary vs. Primary Markets
Does the issuing company raise new funds in the secondary market?
No, new funds are not raised by the issuing company.
p.48
Types of Financial Instruments
What rights do common shareholders have?
Voting rights and preemptive rights.
p.17
Primary vs. Secondary Markets
What is a dividend reinvestment plan?
The reinvestment of dividends into the corporation for additional shares.
p.18
Secondary vs. Primary Markets
How does an active secondary market affect the primary market?
It increases the appeal of buying new shares in the primary market.
p.31
Primary vs. Secondary Markets
Can negotiable bank certificates of deposit be resold?
Yes, in a secondary market.
p.24
Participants in Financial Markets
What are the two main stock exchanges in Vietnam?
HOSE (Ho Chi Minh Stock Exchange) and HNX (Hanoi Stock Exchange).
What are the key attributes of financial assets?
Return, risk, liquidity, and timing of cash flows.
p.20
Types of Financial Instruments
What are over-the-counter contracts?
Non-standardized contracts negotiated between the writer and buyer.
p.24
Participants in Financial Markets
What is the regulatory body in Australia for securities?
Australian Securities and Investments Commission (ASIC).
p.15
Types of Financial Markets
What type of market does the Ho Chi Minh Stock Exchange (HOSE) represent?
A stock exchange in Vietnam.
p.37
Financial Instruments
What is the formula for calculating the opportunity cost of forgoing a discount?
Opportunity cost = (% discount / (100 - % discount)) × (365 / days difference between early and late settlement).
p.51
Financial Instruments
How does the liquidity of securities benefit investors?
It facilitates investor diversification and encourages investment in corporate securities.
p.41
Types of Financial Instruments
What is an example of a pure discount bond?
A bond with a face value of $1000 maturing in one year and purchased for $950.
p.37
Financial Instruments
What is the opportunity cost of forgoing a 1% discount with a 7-day early payment option?
0.160298 or 16.03% per annum.
p.51
Why do different financial institutions exist?
What does the separation of ownership and control allow for in a corporation?
Appointment of specialized management.
p.37
Financial Instruments
What does 'n' represent in trade credit terms like 2/10, n/30?
'n' represents the net amount due after the discount period.
p.27
Money Market vs. Capital Market
Why are Treasury bills considered risk-free?
They are backed by the government.
p.5
Primary vs. Secondary Markets
What is the primary market?
The market for the issuance of a security, where it is first made available for purchase.
p.36
Debt vs. Equity Markets
What does the matching principle state?
Short-term assets should be funded with short-term liabilities.
p.5
Primary vs. Secondary Markets
What is the secondary market?
The market where securities are bought from other investors after the initial issuance.
p.52
Why do different financial institutions exist?
What action can shareholders take at the annual general meeting (AGM)?
Dismiss management from the board.
p.54
Types of Financial Instruments
How can derivative instruments benefit investors during a decline in asset value?
They can generate gains if the value of the underlying assets declines.
p.52
Why do different financial institutions exist?
What is a potential consequence for managers if they do not align with shareholder interests?
Threat of takeover and loss of employment.
p.57
Types of Financial Instruments
What is the premium in options trading?
An up-front fee received by sellers of call options from the purchaser as compensation.
p.7
Types of Financial Instruments
What are the types of equity?
Ordinary shares, hybrid securities, preference shares, convertible notes.
p.57
Types of Financial Instruments
What do options represent in financial markets?
The right to buy (call) or sell (put) a specific asset at a certain price during or at the end of a specified duration.
p.7
Debt vs. Equity Markets
What is the difference between secured and unsecured debt?
Secured debt is backed by collateral, while unsecured debt is not.
p.38
Debt vs. Equity Markets
What are bonds?
Long-term debt securities issued by corporations and government agencies.
p.20
Financial Instruments
What is a derivative?
A financial security that derives its price from an underlying commodity or financial instrument.
p.23
Role of Stock Exchanges
What are listing rules?
Stock exchange rules that a listed entity must comply with.
p.24
Participants in Financial Markets
What is the regulatory body in Vietnam for securities?
State Securities Commission (SSC).
p.38
Debt vs. Equity Markets
What do issuers promise to bondholders?
To repay the principal amount on a specified future date.
p.20
Types of Financial Instruments
What are exchange-traded contracts?
Standardized financial contracts traded on a formal exchange.
p.11
Primary vs. Secondary Markets
What is the purpose of the primary market?
To supply capital for corporations.
p.47
Types of Financial Instruments
What does limited liability mean for shareholders?
The most shareholders can lose in the event of corporate failure is their original investment.
p.38
Debt vs. Equity Markets
What is maturity in the context of bonds?
The period from the date of issuing to the expiration date.
p.5
Types of Financial Markets
What are the main types of financial markets?
Debt market, equity market, derivatives market, primary market, secondary market, money market, capital market.
How is market turnover calculated?
Number of shares on issue multiplied by the current share price.
p.52
Why do different financial institutions exist?
What is the main disadvantage of the corporate form?
The separation of ownership and control.
p.20
Purpose of Financial Markets
What are the two main purposes of derivatives?
Risk management (hedging) and speculative instruments.
p.5
Types of Financial Instruments
What instruments are included in the debt market?
Retail private debt (credit card, car loan, mortgage), company private debt, corporate bonds, government bonds, notes and bills, asset-backed obligations.
p.22
Types of Financial Markets
What system does the ASX use for settlement?
CHESS (Clearing House Electronic Sub-register System).
p.54
Types of Financial Instruments
What are derivative instruments?
Financial contracts whose values are derived from the values of underlying assets.
p.43
Financial Instruments
What secures a secured bond?
A fixed or floating charge over the issuer’s unpledged assets.
p.23
Role of Stock Exchanges
Why is the disclosure of directors’ interests important?
To ensure transparency and prevent conflicts of interest.
p.26
Financial Instruments
What are some sources of long-term debt instruments?
Term Loans, Unsecured Notes, Bonds, Project Finance.
p.27
Money Market vs. Capital Market
What is the selling method of Treasury bills?
They are sold at a discount from par value.
p.21
Purpose of Financial Markets
How does transparency add value to a debt issue?
It provides information about price, yield, maturity, and credit rating of debt instruments.
p.22
Participants in Financial Markets
Who is a CHESS sponsor?
A market participant with access to CHESS, such as a stockbroker.
p.5
Types of Financial Instruments
What are derivatives in financial markets?
Options, swaps, forward, and future contracts.
p.45
Types of Financial Instruments
What is a dividend?
A payment made to shareholders from a corporation's earnings.
p.12
Participants in Financial Markets
Who are the main participants in financial markets?
Individuals, institutions, governments, and corporations.
p.22
Types of Financial Markets
What is the role of integrated computer-based trading systems?
To trade all listed securities and derivatives.
p.44
Types of Financial Instruments
What are the three principal methods of issuing securities?
Public issue, family issue, and private placement.
p.33
Types of Financial Instruments
What is the key characteristic of the contract in commercial paper?
It requests unconditional payment for a definite amount of money.
p.44
Types of Financial Instruments
What is a public issue?
Securities issued to the public at large, by prospectus.
p.38
Debt vs. Equity Markets
What are the two main types of bonds by issuer?
Corporate bonds and Treasury bonds.
p.16
Role of Stock Exchanges
What are the trading and settlement roles of a stock exchange?
To ensure efficient execution of trades and the settlement of transactions.
p.26
Financial Instruments
What defines intermediate to long-term financial instruments?
Instruments with a maturity of more than 12 months.
p.38
Debt vs. Equity Markets
What are the two types of bonds by coupon rate?
Plain-vanilla bonds and floating rate bonds.
p.14
Role of Stock Exchanges
What is the role of the exchange in trading?
To facilitate the trading of securities.
p.57
Types of Financial Instruments
What does a put option give the holder?
The right to sell the underlying asset by a certain date for a certain price.
p.51
Why do different financial institutions exist?
Why is the corporate form suited to large-scale operations?
It can obtain large amounts of finance and has specialized management.
p.21
Purpose of Financial Markets
What facilitates ease of entry in the interest rate market?
An electronic trading system that allows buy and sell orders at minimum cost and time delay.
p.45
Types of Financial Instruments
What is the face value of a stock?
The nominal value assigned to a share of stock.
p.7
Debt vs. Equity Markets
What happens to equity in the event of liquidation?
Equity holders have a residual claim on remaining assets.
What is liquidity in financial markets?
The relative ease and speed with which an asset can be converted into money.
p.16
Role of Stock Exchanges
What does the managed product role of a stock exchange involve?
Overseeing and managing investment products for investors.
p.27
Money Market vs. Capital Market
What is the face value of a Treasury bill?
The set amount paid at maturity.
p.11
Primary vs. Secondary Markets
What is the secondary market?
A financial market where previously issued securities can be resold.
p.55
Types of Financial Instruments
When does the transaction of a forward contract take place?
After the expiration date.
p.30
Financial Instruments
What determines the federal funds interest rate (FFR)?
The forces of supply and demand in a competitive market.
p.27
Money Market vs. Capital Market
What is the yield for investors in Treasury bills?
The increase in the value of the security from purchase to maturity.
p.30
Financial Instruments
What is the effective federal funds rate?
The weighted average of rates on trades through New York brokers, reported by the press.
p.41
Types of Financial Instruments
Do pure discount bonds make any payments during their term?
No, they do not make any payments during the term.
p.52
Why do different financial institutions exist?
How may management act in a way that conflicts with shareholder interests?
By running the business for their own benefit rather than maximizing shareholder value.
p.54
Types of Financial Instruments
What are the two main purposes of derivative instruments?
Speculation and risk management.
p.21
Debt vs. Equity Markets
What is the role of the interest rate market?
The listing, quotation, and trading of typically longer-term debt instruments on a stock exchange.
p.55
Types of Financial Instruments
What is the spot price?
The price for immediate delivery of the asset.
p.57
Types of Financial Instruments
When can American options be exercised?
At any time up to the expiration date or maturity.
p.45
Types of Financial Instruments
What is book value in relation to stocks?
The value of a company's assets minus its liabilities.
p.10
Primary vs. Secondary Markets
What are secondary markets?
Financial markets where previously issued securities can be resold.
What does liquidity indicate about securities?
The degree to which they can be easily liquidated without a loss of value.
p.43
Financial Instruments
What do lenders receive during the term of a bond?
Regular interest payments (coupon).
p.16
Role of Stock Exchanges
What is the interest rate market role of a stock exchange?
To provide a platform for trading interest rate-related securities.
p.11
Primary vs. Secondary Markets
What is a key characteristic of securities traded in secondary markets?
Liquidity, which is the degree to which securities can easily be liquidated (sold).
p.39
Types of Financial Instruments
What does the issuer pay at the end of the bond's maturity?
The face value of the bond.
p.51
Why do different financial institutions exist?
What is a benefit of having specialized management in a corporation?
Greater effectiveness in the planning and implementation of strategic decisions.
p.44
Types of Financial Instruments
What is a private placement?
Securities issued to institutional investors, by information memorandum.
p.44
Types of Financial Instruments
At what value are securities usually issued?
At face value, but may also be issued at a discount or with deferred/zero interest.
p.26
Financial Instruments
What are preferred shares?
A type of equity that provides dividends before common shares.
p.28
Money Market vs. Capital Market
What is the discount rate for the Treasury bill?
Calculated using the formula: (Face Value - Purchase Price) / Face Value * (365 / Days to Maturity).
p.54
Types of Financial Instruments
How do financial institutions use derivative securities?
To adjust the risk of existing investments in securities.
p.57
Types of Financial Instruments
When can European options be exercised?
Only on the expiration date itself.
p.10
Primary vs. Secondary Markets
What are primary markets?
Financial markets where new issues of a security are sold to initial buyers.
p.7
Debt vs. Equity Markets
How does debt rank compared to equity?
Debt ranks ahead of equity.
p.10
Primary vs. Secondary Markets
What is the main difference between primary and secondary markets?
Primary markets deal with new securities, while secondary markets deal with resale of existing securities.
p.5
Types of Financial Instruments
What instruments are included in the equity market?
Shares, listed company common and preferred shares.
p.36
Debt vs. Equity Markets
What are some characteristics of short-term debt?
Timing of repayment, risk, interest rate structures (variable or fixed), and source of funds.
p.48
Types of Financial Instruments
What claims do common shareholders have?
Claims on income and assets.
p.57
Types of Financial Instruments
What does a call option give the holder?
The right to buy the underlying asset by a certain date for a certain price (strike price).
p.21
Types of Financial Instruments
What are some examples of debt instruments traded in the interest rate market?
Straight corporate bonds, floating rate notes (FRNs), convertible notes, and preference shares.
p.22
Types of Financial Markets
What does the electronic sub-register in CHESS record?
The ownership of listed securities.
p.44
Types of Financial Instruments
What does a prospectus contain?
Detailed information about the business.
p.45
Types of Financial Instruments
What is the market price of a stock?
The price at which it is bought and sold in the market.
p.26
Types of Financial Instruments
What are some examples of derivatives?
Forwards, Futures, Options, Swaps.
p.5
Types of Financial Markets
What is the foreign currency market?
A market for the exchange of currency pairs.
p.7
Debt vs. Equity Markets
What does negotiable debt mean?
Ownership is transferable, such as commercial bills and promissory notes.
p.7
Debt vs. Equity Markets
What is an example of non-negotiable debt?
A term loan obtained from a bank.
p.38
Debt vs. Equity Markets
What are the two types of bonds by interest payment?
Coupon bonds and zero-coupon bonds.
p.11
Primary vs. Secondary Markets
How does the primary market determine the price of a security?
The price is determined by the issuing firm.
p.51
Why do different financial institutions exist?
What does 'perpetual succession' mean in the context of corporations?
The corporate form is unaffected by changes in management or ownership.
p.36
Debt vs. Equity Markets
Why is the matching principle important?
Its importance was highlighted by the Global Financial Crisis (GFC).
p.5
Money Market vs. Capital Market
What defines the money market?
It consists of fixed income securities with a maturity of less than a year.
p.28
Money Market vs. Capital Market
What is the investment rate for the Treasury bill?
Calculated using the formula: (Face Value - Purchase Price) / Purchase Price * (365 / Days to Maturity).
p.7
Debt vs. Equity Markets
What are dividends?
Payments made to shareholders from earnings.
p.10
Primary vs. Secondary Markets
Who are the initial buyers in primary markets?
Investors who purchase new securities directly from issuers.
p.54
Types of Financial Instruments
How do derivative instruments allow for speculation?
They enable investors to speculate on movements in the value of underlying assets without purchasing those assets.
p.16
Role of Stock Exchanges
What is the regulatory role of a stock exchange?
To enforce rules and regulations to maintain market integrity.
p.43
Debt vs. Equity Markets
What is the claim of secured bondholders over a company's assets?
A higher claim than unsecured note holders.
p.5
Money Market vs. Capital Market
What defines the capital market?
It consists of securities with a maturity equal to or greater than a year.
p.21
Purpose of Financial Markets
How does liquidity benefit debt instruments in the interest rate market?
Quotation on a stock exchange provides access to a wider market.
p.57
Types of Financial Instruments
What is the main difference between call and put options?
Call options give the right to buy, while put options give the right to sell the underlying asset.
p.52
Why do different financial institutions exist?
What can enhance the alignment of interests between owners and managers?
More rigorous corporate governance.
p.7
Debt vs. Equity Markets
What is debt?
A contractual claim to periodic interest payments and repayment of principal.
p.7
Debt vs. Equity Markets
What are the two main terms for debt instruments?
Short term (money market) and medium to long term (capital market).
