CS Intermediate Level
Financial Markets and Specialised Institutions cheat sheet
Every chapter's key points, formulas and definitions on one page, for the last week before the exam. Each heading links to the chapter that explains it.
Market organisation and structure
- Financial markets perform price discovery, provide liquidity, allocate capital, transfer risk and aggregate information into prices.
- The money market trades short-term debt of a year or less, such as Treasury bills and commercial paper; the capital market trades longer-term equities and bonds.
- The primary market issues new securities directly to investors, while the secondary market, such as the Nairobi Securities Exchange, trades securities already issued.
- The financial system channels funds from surplus units to deficit units, either directly through the markets or indirectly through intermediaries such as banks and fund managers.
- A well-functioning system is efficient, liquid, stable, transparent and accessible, and Automated Trading Systems now match orders electronically instead of open outcry.
Key terms
- Money market
- Trades short-term debt instruments, maturities of a year or less, Treasury bills, commercial paper.
- Capital market
- Trades longer-term instruments, equities and bonds, the market this paper focuses on most.
- Debt instruments
- Represent a loan the issuer must repay, bonds, bills.
- Equity instruments
- Represent ownership, shares, carrying no fixed repayment obligation.
- Primary market
- Where new securities are issued directly to investors (see the chapter on raising capital).
- Secondary market
- Where already-issued securities are subsequently traded between investors, the Nairobi Securities Exchange (see the chapter on the securities exchange).
- Exchange-traded market
- Trading occurs on a formal, regulated exchange with standardised rules.
- Over-the-counter (OTC) market
- Trading occurs directly between parties without a centralised exchange.
- Equities
- Ordinary and preference shares, representing ownership and carrying variable, residual return.
- Government bonds and bills
- Debt issued by the state, generally the lowest-risk instrument in a domestic market.
- Corporate bonds
- Debt issued by companies, carrying credit risk specific to the issuer.
- Currencies
- Traded on foreign exchange markets, underlying much cross-border investment and trade.
- Derivative contracts
- Instruments whose value derives from an underlying asset, used to hedge or speculate on price movements.
- Commodities
- Physical goods, agricultural products, metals, energy, traded as an asset class in their own right.
The rest of the sheet covers
- Raising capital in the securities market
- The central depository system
- The securities exchange
- Securities transactions
- Financial markets regulation
- Specialised institutions
- Exam technique and revision
- Glossary