The Finance Assets Essay Example

Increased institutionalization of financial markets, Advances in telecommunications and computer technologies, Deregulation or liberalization of major financial markets. Securities of issuers not domiciled in the country are traded in foreign market. Derivative instruments can be used for speculative purposes. Two basic types of derivative instruments are option and futures. The bid-ask spread is the difference between the price the market maker is willing to sell a financial asset and the price the market maker is willing to buy a financial asset. The risk attached to financial assets whose cash flows are not denominated in U.S. dollars is called foreign exhange risk

 Securities traded in the external market are distinguished by: Being offered simultaneously to investors in a number of countries. Being issued outside the jurisdiction of any single country. Financial institutions provide these services: Exchanging financial assets on behalf of customers. Providing investment advice. Managing portfolios. Assisting in the creation of financial assets. Treasury securities are debt obligations issued by central gov. The depository institutions are: Commercial banks. Savings and loan associations. Savings banks. Credit unions. the following transactions is an example of direct investment: An investment company buys a portfolio of stocks and bonds. An individual makes a deposit at a commercial bank.

Financial intermediaries transfer financial assets that are less desirable into other financial assets, which are more widely preferred by the public. This transformation involves several economic functions: Providing maturity intermediation. Risk reduction via diversification. Reducing the costs of contracting and information processing. Providing payments mechanism. Maturity intermediation has implications for financial markets in that: Investors have more choices concerning the maturity of their investments.

Borrowers have more choices

for the length of their debt obligations. Investors will require that long-term borrowers pay a higher interest rate than on short-term borrowing. In contrast to individual investors, financial intermediaries will be willing to make longer term loans, and at a lower cost to borrowers, because: They are counting on successive deposits providing the funds until maturity. Investors who place their funds in an investment company, which in turn invests the funds received in the stock of a large number of companies benefit from: Diversification and Reduced risk.

 With a debit card, A bill is sent to the debit cardholder periodically requesting payment for transactions that have been made in the past. Funds are immediately withdrawn from the purchaser’s account at the time the transaction takes place. Funds are withdrawn periodically (usually once a month) for transactions made by the cardholder during the previous month. Depository institutions seek to generate income by The difference between the return that they earn on assets and the cost of their funds. A fixed-rate deposit represents type 1 liability to a financial institution.

Type-II liability: Amount of cash outlay is known while timing of cash outlay is unknown. The advantage of liquidity which financial intermediaries offer savers means that savers may: Request the withdrawal of funds at any time. Redeem their shares at any time. Borrow against the cash value of their insurance policy.

 A perfectly competitive market is characterized by efficiency and low cost production. “Market failure” is cited by economists as a reason for regulation. Government regulation of financial markets takes these forms: Disclosure regulation. Financial activity regulation. Regulation of financial institutions. Regulation of foreign

participants. When financial institutions’ activities are restricted in the areas of lending, borrowing, and funding, the regulation is referred to as regulation of financial institution. Liquidity-generating innovations: Increase the liquidity of the market. Allow borrowers to draw upon new sources of funds.

Allow market participants to circumvent capital constraints imposed by regulations. One of the results of the financial innovations, which have occurred since the 1960, has been the introduction of market-broadening instruments, which increase the liquidity of markets and the availability of funds by: Attracting new investors. Offering new opportunities for borrowers. The ultimate causes of financial innovations include: Increased volatility of interest rates, inflation, equity prices, and exchange rates. Advances in computer and telecommunication technologies. Financial intermediary competition. Changing global patterns of financial wealth. Depository institutions include Savings and loans associations.

Savings banks. Credit unions. Commercial banks. In generating spread income, depository institutions face several risks. They include: Credit risk. Regulatory risk. Interest rate risk. Depository institutions accommodate net withdrawals and loan demand by: Attracting additional deposits. Selling securities it owns. Raising short-term funds in the money market. Using existing securities as collateral for borrowing from a federal agency or other financial institution. Loans to nonfinancial corporations, financial corporations and government entities fall into the category of institutional banking. Banks are highly leveraged financial institutions, which means that most of their funds come from: Deposits. Borrowing from the Federal Reserve through the discount window. Capital gains from the sale of securities. The market where banks can borrow and lend reserves is called the federal funds market

If actual reserves exceed required reserves, the difference is referred to as excess reserve.

The discount rate is the interest rate charged to borrowed funds at the discount window. Member banks can borrow from the Fed in order to: Meet short-term liquidity needs. Meet required reserves. Until the 1960, Regulation Q had virtually no impact on the ability of banks to compete with other financial institutions to obtain funds because: Market interest rates stayed below the ceiling rate. the principal objectives of the risk-based capital requirements: Greater consistency in evaluating the capital adequacy of major banks.

Capital adequacy standards that consider the risk profile of the bank. The Garn-St. Germain Act of 1982 expanded the types of assets in which S&Ls could invest. The acceptable list now includes: Consumer loans. Municipal securities. The principal assets of savings banks are: residential mortgages. The primary source of funds for credit unions is deposit of their member. Regulation Q allowed the Fed to impose: Permissible activities for commercial banks. The borrowings by S&Ls from the Federal Home Loan Banks are called: advances. Since credit unions are owned by their members, member deposits are called: shares. The basic motivation behind the creation of S&Ls was provision of funds for financing: The purchase of a home.

Continual bank borrowing at the Fed for long periods and in large amounts is viewed as a sign of: A bank’s financial weakness. Exploitation of the interest differential for profit. types of investment companies are Open-end funds. Closed-end funds. Unit trusts. Investors in mutual funds incur: Fund sales charges. Annual operating expenses. Interest. Shares selling below the net asset value (NAV) are said to be trading at discount. The family of funds concept represents the strategy

of the mutual fund industry to offer investors a choice of numerous funds with different investment objectives in the same fund family. Thus, investors may move their assets among: Money market funds. Global stock and bond funds.

Broadly diversified stock funds. Stock funds devoted to particular sectors. Exchange-traded mutual funds have several characteristics: ETFs are traded like stocks on an exchange. ETFs are similar to closed-end funds. ETFs avoid realized capital gains and the taxation thereof due to their low portfolio turnover. When the asset manager customizes the investment selection to the objectives of the investor, this is referred to as: An individual-traded fund. The term “hedge fund” was first used to describe: The private investment fund of Alfred Winslow Jones.

The management fee structure for hedge funds is: A fixed fee based on the market value of assets managed. A performance-based incentive fee. A fund in which the asset manager retains some exposure to systematic risk is: A market directional hedge fund. convergence trading hedge funds: Fixed income arbitrage hedge funds. Equity market neutral hedge funds. Convertible bond arbitrage hedge funds. Relative value hedge funds.

Pension funds are financed by contributions from employers. The different types of pension plans include: Defined benefit plans. Defined contribution plans. By far the fastest growing sector of the defined contribution plans is the: 401(k) plan, 403(b) plan. 457 plan. In a defined contribution plan, the plan sponsor is responsible for making Specified contributions into the plan on behalf of qualifying participants. Pension equity and floor-offset plans are examples of: hybrid plans. Pension plans are regulated under Employee Retirement Income Security Act.

The Pension Funding

Equity Act: Set funding standards for the minimum contributions that a plan sponsor must make to the pension plan to satisfy the actuarially projected benefit. When the value of the assets of a defined benefit plan is exceeded by the value of its liabilities, the plan is said to have a surplus. The pension crisis being faced by corporate defined benefit plans is due to: Poor management. The accounting permitted by accountants with the aid rules of actuaries.

 Financial markets dealing with financial claims that are newly issued are called: primary markets. The secondary market is the market for the trading of seasoned securities. The activities of underwriters are regulated by The Securities and Exchange Commission. The preliminary prospectus, which may be distributed to the public during the waiting period for the registration of the security to become effective, is referred to as red herring. Rule 415, which permits certain issuers to file a single registration document indicating that it intends to sell a certain amount of a certain class of securities at one or more times within the next two years, is popularly referred to as shelf registration. SEC regulation, which exempts some issues from registration, is the Regulation D. Rule 144. A will contribute to the growth of the private placement market by Attracting new large institutional investors into the market.

An underwriting arrangement whereby an investment banking firm or group of firms offers a potential issuer of debt securities a firm bid to purchase a specified amount of the securities with a certain coupon rate and maturity is known as bought deal. Some underwriting firms have found the bought deal

to be attractive because it Offers timing flexibility and Reduces the risk of capital loss. When the issuer announces the terms of the issue and interested parties submit bids for the entire issue, the arrangement is referred to as Auction process.

Competitive bidding underwriting is mandated for certain securities of: Regulated public utilities. Municipal debt obligations. When all bidders pay the highest winning yield bid in a competitive bidding underwriting, this type of auction is referred to as dutch auction. An underwriting arrangement in which the underwriter buys the firm’s unsubscribed shares is known as Standby underwriting arrangement.

A corporation can issue new common stock directly to existing stockholders through a Preemptive rights offering. When world capital markets are mildly segmented, there are opportunities to Raise funds at a lower cost in capital markets of another country. A firm may seek to raise funds outside its domestic capital market for one or more of the following reasons: The amount of capital sought cannot be raised in its local market. There is an opportunity to raise funds at a lower cost. Funds denominated in another currency are sought. The firm seeks to diversify funding costs. In a completely integrated capital market: There are no restrictions to prevent investors from investing in securities issued in any capital market throughout the world.

When the issuer of a security files a registration statement with the SEC, part I of the registration is The prospectus. Any company that publicly offers a security in the U.S. becomes a reporting company and, as such, is subject to The Securities Exchange Act of 1934. Non-U.S. companies, which publicly offer a

security in the U.S., must file financial statements based on US GAAP. The key distinction between a primary market and a secondary market is that: In the secondary market the issuer of the asset does not receive funds from the buyer. In the secondary market the existing issue changes hands.