FINM1001 flashcards

to facilitate the purchase and sale of financial instruments including equity, debt instruments, derivatives and foreign currencies.

• the time value of money

• arbitrage

• diversification

it forms the basis for all asset valuations and is broke into financial mathematics and return calculations, valuing bonds, and making investment decisions

it displays the reduction of risk done by market participants to make as much money as possible. so instead of putting in money in one company alone, market participants will put money into multiple companies.

this is the ability to take advantage of different prices in different markets to make the most effective purchase. it is used in the valuation of future contracts, option contracts and forward contracts.

a mechanism that facilitates the purchase and sale (trade) of financial instruments including equity, debt instruments, derivatives and foreign currencies.

it:

• brings together of lenders (savers) and borrowers, aiding in the transfer of funds from people who wish to lend them to people who wish to borrow them (capital raising)

• allows the transference of funds between parties

• allows international trade between individuals, companies, and governments

lenders have more than they wish to consume. therefore:

• they loan funds that are excess to their consumption to other market participants (borrowers).

• In exchange they receive a positive rate of return on these funds from the people they lend to.

borrowers have less than they want to invest. therefore:

• they borrow funds that are required to meet their current consumption or investment requirements.

• In exchange, they pay a positive rate of return on these funds to the people they lend from.

this is an institution such a bank that holds funds from lenders in order to make loans to borrowers

• commercial banks

• building societies

• credit unions

• insurance companies

• superannuation funds

lenders who have surplus funds lend these funds to others (borrowers) through financial markets. this can be done on individual, company, and government level.

• money market

• capital market

• derivatives market

• foreign exchange markets

the money market is a market that facilitate short-term borrowing and lending. this is usually a time frame of less than a year. the capital market is a market is a market that facilities medium to long-term borrowing. this is usually longer than a year.

• the short-term government debt market - this includes treasury bills and treasury notes.

• the interbank market

• the bills market

• the commercial paper market

• the negotiable certificates of deposit (CD) market

• medium to long-term debt instruments like

  • corporate debt

  • government debt

• equity - this considered at medium to long term borrowing as businesses can technically exist forever.

Short-term debt instruments issued by corporations are classified as forming part of the money markets, while company issued medium-to-long term instruments are traded in the capital markets.

these instruments include:

• loans

• debentures

• unsecured notes

• subordinated debt.

While these bonds have varying maturities, they are invariably in excess of 1 year, meaning they are traded in the capital markets.

these instruments include:

• budget expenditures

Providers of equity finance receive a share in the ownership of the business in which they have purchased shares, providing the businesses with a source of long-term funding for use across a number of activities.

This includes both ordinary and preference shares which are sought by both public and private companies.

• They allow you to lock in the price of an asset in advance.

• They are available over a wide range of assets including shares and debt instruments

• Examples of derivatives include forwards contracts, futures contracts and options contracts.

locks in the price for a good and can be a good or bad thing depending on how prices rise and fall respectively

locks in the price for a good and can be a good or bad thing depending on how prices rise and fall respectively

allows an individual choose whether they use their locked in price or the market price

Foreign exchange markets allow market participants to convert their money between currencies. Market participants can convert their money from currency A to currency B at the exchange rate.

both the money and capital market can be further split in the the primary and the secondary market.

• the primary market consists of transactions with newly issued instruments and therefore raise funds for issuers.

• the secondary market transactions represent transferring from one holder to another, therefore not raising any additional funds for the issuer.

This is the direct lending between companies. This is considered to be in the money market.

formula

Compound - FV = PV (1+r)^n

Simple = FV = PV + PV*r*n

Answer = 12968.71

formula

Compound - FV = PV (1+r)^n

Simple = FV = PV + PV*r*n

Answer = 13710.59

formula

Compound - FV = PV (1+r)^n

Simple = FV = PV + PV*r*n

Answer = 3019.38

formula

Compound - FV = PV (1+r)^n

Simple = FV = PV + PV*r*n

Answer = 26801.91

formula

Compound - FV = PV (1+r)^n

Simple = FV = PV + PV*r*n

Simple Answer = 13300

Compound Answer = 13676.31

formula

simple - PV = FV/(1+R*N)

compound - PV = FV/ (1+r)^n

Simple Answer = 400

Compound Answer = 308.43

formula

simple - PV = FV/(1+R*N)

compound - PV = FV/ (1+r)^n

Simple Answer = 240

Compound Answer = 235.06

formula

simple - PV = FV/(1+R*N)

compound - PV = FV/ (1+r)^n

Simple Answer = 806.45

Compound Answer = 789.40

formula

simple - PV = FV/(1+R*N)

compound - PV = FV/ (1+r)^n

Simple Answer = 384.62

Compound Answer = 232.57

they are a finite number of cash flows that are equal in value and are evenly spaced.

• ordinary annuities

• deferred annuities

• annuities due

this is one where the time between now and the first cash flow is the same as the time separating the subsequent cash flow`

a bank loan

this is where the first cash flow occurs immediately.