Question

Please limit your answer to a maximum of one short paragraph per question

1. Explain: broker vs dealer

2. Explain: underwriting

3. Explain and name one financial instrument for each market: money markets vs capital markets

4. What is and what does the Securities and Exchange Commission do?

5. i=10% and you will get $1,210 in two years. What is the future value of this cash flow

6. i=10% and you will get $1,210 in two years. What is the present value of this cash flow..

Answer 1

Q1) Broker vs Dealer

Brokers and dealers are terms associated with securities. Though both have almost the same work, they are different in many aspects. The main difference between a broker and a dealer is in respect of their role in the market, as well as the capital required. A broker is a person who executes the trade on behalf of others, whereas a dealer is a person who trades business on their own behalf.A dealer is a person who will buy and sell securities on their account. On the other hand, a broker is one who will buy and sell securities for their clients. When dealing with securities, dealers make all decisions in respect of purchases. On the other hand, a broker will only make purchases as per the client’s wishes. While dealers have all the rights and freedom regarding the buying and selling of securities, brokers seldom have this freedom and these rights.

Q2) Underwriting

Underwriting refers to the structured process used by financial service companies, such as banks, investors, or insurers, to determine and price the risk from a potential client. Underwriting is the process by which an individual or institution takes on financial risk for a fee. The risk can relate to almost anything but most commonly involves loans, insurance or investments. The word underwriter originated from the practice of having each risk-taker write his name under the total amount of risk he was willing to accept at a specified premium. Although the mechanics have changed over time, underwriting continues today as a key function in the financial world. Three types of underwriting: 1) Loan Underwriting 2) Insurance Underwriting 3) Securities underwriting

Q3) (a) Money Market Instrument

Treasury Bills (T-Bills) Issued by the Central Government, Treasury Bills are known to be one of the safest money market instruments available. However, treasury bills carry zero risk. I.e. are zero risk instruments. Therefore, the returns one gets on them are not attractive. Treasury bills come with different maturity periods like 3-month, 6-month and 1 year and are circulated by primary and secondary markets. Treasury bills are issued by the Central government at a lesser price than their face value. The interest earned by the buyer will be the difference of the maturity value of the instrument and the buying price of the bill, which is decided with the help of bidding done via auctions.

Q3) (b)Capital Market Instrument

Equity Shares: Equity Shares are the ordinary shares of a limited company. It is an instrument, a contract, which guarantees a residual interest in the assets of an enterprise after deducting all its liabilities- including dividends on preference shares. Equity shares constitute the ownership capital of a company. Equity holders are the legal owners of a company.

Q4) What is and what does Securities and Exchange Commission do?

The U.S. Securities and Exchange Commission (SEC) is an independent federal government agency responsible for protecting investors, maintaining fair and orderly functioning of securities markets and facilitating capital formation. The SEC promotes full public disclosure, protects investors against fraudulent and manipulative practices in the market, and monitors corporate takeover actions in the United States. The SEC oversees the key participants in the securities world, including securities exchanges, securities brokers and dealers, investment advisors, and mutual funds. Here the SEC is concerned primarily with promoting the disclosure of important market-related information, maintaining fair dealing, and protecting against fraud.

Q5) Future value of the cash flow will be $1,210 i.e the amount which you will get at maturity.

Q6) Present value of the cash flow is determined using the formula--> FCF=PCF(1+R)^n Therefore--> $1,210=PCF(1.10)^2. Hence PCF=$1,000 FCF- Future Cash Flow PCF- Present Cash Flow R- Rate of interest n-Number of years