Question

1. What is finance? 2. What are the functions of investment banker 3. Primary market transaction and secondary market transaction. 4. Capital markets and Money markets 5. The 3 Theories of the Term Structure of Interest Rate

Answer 1

1. The term finance is used to explain the system of money, investments, and other financial instruments. Finance is divided into three distinct categories- Public finance, corporate finance and personal finance. There is also other emerging categories which social finance and behavioral finance.
2. An investment banker is a between large enterprises and the investor. The key role of an investment banker is to give advise to big and wealthy enterpreneur and govt. On how to meet their financial challanges and help them procure financing. The function of an investment bank includes: Research, trading and sales, asset management, wealth management, securitized product.

Research- Investment banker collects information about companies and give advice on whether to buy or sell their stock.

Trading and sales- Firms have trading department that can execute stock and bond transaction on behalf of their clients.

3.) When company sells its stock and bonds for the first time publicly it is called primary market. It is also called IPO(intial public offering). Companies offering securties through primary market also hires an investment banker to obtain commitment from large institutional investors to purchase the securities when offered.

The secondary market is a market where securties are traded after company has sold all the stocks and bond offered on the primary market. Market such as NYSE new york stock exchange, london stock exchange are the secondary market.

4)Capital markets are the frequently followed markets. Stock and bonds daily movements are analyzed. The institution working in capital market- stock exchanges bank , commercial banks and other non banking institution such as insurance companies and mortgage banks. Companies raising money for long term purpose comes under one or more capital market.

Money market is also worked alongside of the capital market. Money market is the best place to park funds that are needed foe shorter period. The instruments used in the money market includes deposit, colleteral loans, bills of exchange.

5) The Theories are-

Market segmentation theory: it assumes that borrower and lenders live in a specific section of the yield curve based on their need to match assets and liablities.

Expectation theory- There are three variations of the expectation theory, one being pure and the other two biased.

1 pure expectation theory- the market expectation for future rates will consistently impact the yield curve shape. A positively shaped curve indicates that rate will increase in future

2 Liquidity prefernce Theory- the investor prefers short term bonds to long term bonds because of the increased uncertainty associated with a longer time horizon

3 Preferred habitat theory- the preferred theory relies on the notion that investors will match assets and liablities