Capital Markets Overview
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Questions and Answers

What are capital markets?

Capital markets are places where savings and investments are channeled between suppliers and those in need. Suppliers are people or institutions with capital to lend or invest.

Which of the following are examples of capital markets?

  • Stock Market (correct)
  • Bond Market (correct)
  • Commodity Market
  • Real Estate Market

What is the primary goal of capital markets?

The primary goal is to improve efficiency and create a transparent market where suppliers of capital can connect with those seeking funds.

Capital markets are only composed of digital spaces.

<p>False (B)</p> Signup and view all the answers

Which of the following are considered suppliers of funds in the capital market?

<p>All of the above (D)</p> Signup and view all the answers

What activity characterizes the primary market?

<p>The primary market is where companies initially sell new stocks or bonds to the public, often through an Initial Public Offering (IPO).</p> Signup and view all the answers

What is the role of an underwriting firm in the primary market?

<p>An underwriting firm, hired by the issuing company, works with investors to purchase securities, reviews the company's financial information, and prepares a prospectus outlining the details of the securities.</p> Signup and view all the answers

Why are small investors often unable to buy securities on the primary market?

<p>Because companies and investment bankers typically want to sell all available securities in a short timeframe to meet their capital needs, often targeting large investors who can purchase significant amounts at once.</p> Signup and view all the answers

What is the distinction between the primary market and the secondary market?

<p>The primary market deals with the initial issuance of new securities by companies. The secondary market, on the other hand, is where those already issued securities are subsequently traded between investors.</p> Signup and view all the answers

Which of the following is an example of a secondary market?

<p>All of the above (D)</p> Signup and view all the answers

Explain the two categories of secondary markets: auction market and dealer market.

<p>The auction market, exemplified by the NYSE, is where buyers and sellers congregate in one location and announce the prices at which they are willing to trade. The dealer market, on the other hand, involves trading through electronic networks between dealers and investors, often with small investors participating in these markets.</p> Signup and view all the answers

Firms can only raise equity capital through private placements.

<p>False (B)</p> Signup and view all the answers

How can a company raise debt capital besides equity?

<p>A company can raise debt capital through bank loans or by issuing bonds in the bond market.</p> Signup and view all the answers

What is the significance of financial institutions in the overall financial system?

<p>Financial institutions serve as intermediaries, connecting lenders with borrowers, facilitating the flow of funds and supporting economic activity.</p> Signup and view all the answers

Explain the concept of direct finance and indirect finance.

<p>Direct finance involves the direct exchange of funds between borrowers and lenders, bypassing intermediaries. Indirect finance, on the other hand, involves financial intermediaries like banks or insurance companies facilitating the flow of funds.</p> Signup and view all the answers

Financial markets are only relevant for businesses and governments.

<p>False (B)</p> Signup and view all the answers

What are the main functions of financial markets?

<p>Financial markets serve to raise capital, facilitate commercial transactions, set prices, value assets, and allow for arbitrage opportunities.</p> Signup and view all the answers

How do financial markets contribute to price setting?

<p>Financial markets provide a dynamic platform where buyers and sellers interact, creating a consensus on the value of assets, resulting in price discovery.</p> Signup and view all the answers

What is the significance of arbitrage in financial markets?

<p>Arbitrage involves exploiting price discrepancies between different markets, taking advantage of temporary price differences to profit.</p> Signup and view all the answers

How do financial markets facilitate investment?

<p>Financial markets provide investors with opportunities to earn a return on their funds, allowing them to accumulate assets and generate income.</p> Signup and view all the answers

Financial markets are only relevant for investors.

<p>False (B)</p> Signup and view all the answers

Explain the role of financial institutions in matching those seeking funds with those who have funds to lend?

<p>Financial institutions act as intermediaries, connecting lenders with borrowers. They hold deposits from savers and lend money to businesses and individuals.</p> Signup and view all the answers

What are the primary functions of a central bank?

<p>Central banks oversee the overall financial system, manage monetary policy, and regulate other financial institutions.</p> Signup and view all the answers

What are the key differences between retail banks and commercial banks?

<p>Retail banks primarily serve individual consumers, offering products like checking accounts and mortgages. Commercial banks work with businesses, providing loans and other services supporting their operations.</p> Signup and view all the answers

What are the key features of credit unions?

<p>Credit unions are nonprofit financial institutions owned and operated by their members, typically serving a specific demographic group, offering traditional banking services and often providing lower interest rates on loans.</p> Signup and view all the answers

What is the primary objective of savings and loan associations?

<p>Savings and loan associations focus primarily on providing residential mortgages to their members, while also offering checking accounts and personal loans.</p> Signup and view all the answers

What are the key services provided by investment banks?

<p>Investment banks provide a wide range of services, including facilitating initial public offerings (IPOs), mergers and acquisitions, risk management, research, investment management, and structuring of derivatives.</p> Signup and view all the answers

How do brokerage firms assist individuals and institutions in buying and selling securities?

<p>Brokerage firms act as intermediaries between investors and sellers, facilitating trades of stocks, bonds, mutual funds, and other securities.</p> Signup and view all the answers

What is the main purpose of insurance companies in the financial system?

<p>Insurance companies provide protection against financial loss due to unforeseen events like death, disability, accidents, or property damage.</p> Signup and view all the answers

What is the primary focus of mortgage companies?

<p>Mortgage companies specialize in originating or funding loans secured by real estate, typically serving both individuals and businesses.</p> Signup and view all the answers

Investment banking activities are limited to mergers and acquisitions.

<p>False (B)</p> Signup and view all the answers

What is the primary purpose of research conducted by investment banks?

<p>Investment research provides investors with insights into companies and market conditions, helping them make informed investment decisions.</p> Signup and view all the answers

Explain the role of investment management in the context of investment banking.

<p>Investment management involves guiding investors on asset allocation, portfolio construction, and trading strategies, helping them manage risk and achieve their financial objectives.</p> Signup and view all the answers

Derivatives products are only used in specific, specialized instances.

<p>False (B)</p> Signup and view all the answers

What is the core function of merchant banking?

<p>Merchant banking involves providing financial and advisory services to clients, acting as a financial engineer for their projects and transactions.</p> Signup and view all the answers

What are the essential aspects of investment management services provided by investment banks?

<p>Investment management services focus on guiding investors on asset selection, portfolio construction, and trading strategies, aiming to help them achieve their investment goals while managing risk.</p> Signup and view all the answers

Flashcards

What are capital markets?

Places where savers and investors channel their funds to those in need of capital.

What is the primary capital market?

The process of a company selling new stocks or bonds to the public for the first time. It's like an initial public outing for their securities.

What is the secondary capital market?

A market where previously issued securities are traded between investors. It's like a secondhand market for financial assets.

What is a private placement?

The process of a company raising capital from a select group of private investors, not through a public stock exchange.

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What is an IPO (Initial Public Offering)?

The first time a company sells its shares to the public on the stock market. It's their official public debut as a company.

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What is a financial market?

A marketplace where individuals, corporations and institutions come together to either lend or borrow money.

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What is the function of a financial market?

The process of transferring funds from those who have a surplus to those who need them, efficiently connecting lenders and borrowers.

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What is a financial institution?

A company that provides various financial services, acting as an intermediary in financialtransactions like deposits, loans, investments, and currency exchange.

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What is the Bangko Sentral ng Pilipinas?

The central bank in the Philippines, responsible for managing the country's financial system and monetary policy.

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What are retail banks?

Banks that primarily cater to individual consumers, offering services like checking accounts, personal loans, and mortgages.

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What are commercial banks?

Banks that focus on providing financial services and products to businesses, such as loans, financing, and investment banking.

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What are internet banks?

Banks that operate solely through online platforms, offering all the traditional banking services without brick-and-mortar branches.

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What are credit unions?

Nonprofit financial institutions owned and operated by their members, offering traditional banking services at competitive rates.

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What are savings and loan associations?

Financial institutions that primarily cater to individual consumers, offering checking accounts, personal loans, and mortgages.

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What are investment banks?

Financial institutions that provide services to corporations and governments in complex financial transactions, such as mergers, acquisitions, and IPOs.

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What are brokerage firms?

Financial institutions that help individuals and institutions buy and sell securities, providing access to various financial markets.

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What are mortgage companies?

Financial institutions that specialize in originating or funding mortgage loans, making homeownership more accessible.

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What are insurance companies?

Financial institutions that help individuals and businesses transfer risk by providing insurance policies against potential financial losses.

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What is an IPO (Initial Public Offering)?

The process of a company going public by selling its shares to the public for the first time, raising capital for expansion and growth.

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What is a merger and acquisition (M&A)?

The process of one company buying or merging with another company, expanding its operations and gaining market share.

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What is risk management?

The process of mitigating potential financial risks, such as currency fluctuations, loan defaults, and market volatility.

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What is equity research?

The analysis and valuation of companies, providing insights into their financial performance and future prospects.

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What are derivatives?

Financial instruments that derive their value from underlying assets, such as stocks, bonds, or currencies, offering complex strategies for risk management and profit opportunities.

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What is merchant banking?

A type of investment banking service where the bank acts as a financial advisor to companies, providing consulting services in various areas.

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What is investment management?

The process of managing and advising investors on their investment portfolio, providing customized investment strategies and guidance.

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Study Notes

Capital Markets Introduction

  • Capital markets connect savers and investors
  • Suppliers (banks, investors) provide capital
  • Users (businesses, governments, individuals) seek capital
  • Common markets: stock and bond markets
  • Improve transactional efficiencies
  • Capital markets encompass in-person and digital spaces for trading financial instruments

Primary Market

  • Companies sell new stocks or bonds (initial public offerings, IPOs)
  • Underwriting firms review securities and create prospectuses
  • Small investors often excluded due to short sale period

Secondary Market

  • Regulated venues (e.g., NYSE, Nasdaq) for trading previously issued securities
  • Issuing companies do not participate
  • Two categories: auction and dealer markets
  • Auction: open outcry system, buyers/sellers announce prices
  • Dealer: electronic networks, most small investors
  • After securities sold, they're traded between investors

Raising Capital

  • Companies raise equity capital through private placements
  • Or venture capital, or initial public offerings (IPOs)
  • IPOs involve investment banks, selecting a bank, underwriting, and registration with SEC
  • Also involves setting offer price, aftermarket stabilization, and valuation estimation

Financial Institutions

  • Oversee and manage all other banks - Central Banks
  • Retail and commercial banks deal with individuals or businesses respectively
  • Internet banks use online platforms like any conventional bank
  • Credit unions are non-profit financial institutions owned by their members
  • Savings and Loan (S&L) associations offer checking accounts, personal loans and mortgages
  • Investment banks provide services for complex transactions like mergers, acquisitions, IPOs, financial risk management and derivatives structuring

Brokerage Firms

  • Assist individuals/institutions in buying/selling securities
  • Provide trading access to stocks, bonds, mutual funds, ETFs

Insurance Companies

  • Help transfer risk of loss
  • Protect against financial loss
  • Protect individuals and businesses

Investment Management

  • Help investors manage their portfolio
  • Provide advice on stocks, bonds, and other assets (whether to buy, sell, or hold)

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CAPITAL MARKETS - Reviewer (Midterm) PDF

Description

Explore the world of capital markets through this quiz, focusing on key concepts such as primary and secondary markets. Understand how capital flows between savers and investors, and gain insights into the functioning of equity and debt instruments. Perfect for anyone looking to deepen their knowledge of financial markets.

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