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CHAPTER 6
Securities Funds and Investment Banking
Securities Industry
1
...
Assisting firms in raising capital and providing advice about M&A, corporate restructuring and Finance
b
...
Brokerage and Market Making
a
...
Securities firms (Brokers and Dealers) → secondary market
Bank
1
...
Investment Bank
a
...
Investment Banking: Corporate finance (Coverage; execution), M&A, ECM, DCM, Rating advisory
c
...
Private Bank
4
...
Prior to this, investment banking activities were part
of large, money-center commercial banks
The lines between investment banks and commercial banks again begins to blur as legal separation between investment banks and commercial banks is
no longer required
Following the City-Travelers merger in 1998, the Gramm-Leach-Bliley Act (1999) effectively repealed Glass-Steagall
Basic Framework for Banking and Securities
Global Banks
1
...
Financial Supermarkets (Financial Holding Companies [FHC] and Bank Holding Company [BHC])
a
...
Legal Separation : Banks are prohibited from engaging in securities activities and other financial services such as insurance
Current Issue: Should Glass-Steagall be reinstated? Pros and cons of narrow banking
Pro
-

Con

Protect depositors
Simplify regulation of depository institution
More transparency for depository institution customers
Lessens systematic risk

-

Restricts financial innovation
Limits profit opportunity and competition
Banks will find loopholes just like in the past

Products and Services of Investment Banks
Advisory
Provide strategic advice to
firms

Underwriting

Securities
Debt and Equity

Broker/Dealer

M&A : Mergers and acquisition
Primary Market

Origination

ECM : Equity capital market

Selling

Capital Raising

Syndications

DCM : Debt capital market

Trading

Trading: Client vs Risk-driven Revenues
1
...
Prop trading → Risk-driven revenues = dedicated proprietary trading that is delinked from customer business and substantial residual revenue between
sales and production credit
For most players, capital markets are primarily a client business, not a proprietary trading business → client franchise building and delivery are crucial
The “Volcker Rule” (part of Dodd-Frank Act) prohibits “prop” trading in banks in the US but is in the process of being repelled

Clients

Separates private and public

Chinese Walls and Information Barriers
- Prevents price sensitive info leaking and prevent insider trading

- People of the wall → the boss

Bankers
Corporate finance execution group

Trading
Sales
Derivative

M&A → has the most price sensitive info
ECM
DCM
Derivatives

Risk Management
Credit
Research

Actors in Investment Banks
1
...
Gatekeeper between clients and product specialist
b
...
Building relationship
d
...
Product Specialist
a
...
Really good in the product → need to be able to price the product → know everything about the product
c
...
Deal dynamics: is in both the sell side and the Buy side
Investment Banks
-

Commercial banks

M&A
Equity Capital Markets
Debt capital Markets
Securitization (ABS, MBS)
Derivatives
FX and MM
Syndicated Loans and Asset Sales
Project and Structures Finance

-

Debt capital Markets
Securitization (ABS, MBS)
Derivatives
FX and MM
Syndicated Loans and Asset Sales
Project and Structured Finance
Cash Management
Trade Finance

Deal Dynamics at CA-CIB
Issuers

Corporations, Financial Institutions, Sovereigns, Supranationals, Agencies

CA-CIB Coverage Teams

Corporate Coverage, FInancial Institutions Group, Structured Finance (SFI), Investment Banking, Caisses regionales,
Baking afficialtes of CASA, etc
...

liability management)
Promote out DCM track
record and capabilities
Win Mandates
Structure new issues that
are aligned with investors
needs

Execute bond transactions originated
by DCM, acting as the liaison
between DCM and sales
...


Provide regular market color and
feedback to DCM

Regularly reflect investor sentiment to
syndicate

Provide pricing for new issues at pitch
stare and during execution

Corporate Finance and IB
Corporate FInance Execution (CFE) Head

Geographical Team A
-

1 Director
1-2 VP
Associates
Analysts

Geographical Team B
-

1 Director
1-2 VP
Associates
Analysts

Geographical Team C
-

1 Director
1-2 VP
Associates
Analysts

Number Crunching
Credit/financial analysis and the use of financial ratios
Forecasting cash flows, pro-forma financial statements and financial modeling
Capital budgeting and project evaluation
MarKet Valuation
CAPM
Pitch Books
Deal structure and Pricing
Rationale for the dea
Deal structure
Pricing Information
Impact of deal on companies financial structure
Proposed placement strategy and market impact
Consensus of analyst
Shareholder analysis
Comps:
Industry comparisons: financial ratios, market cap and stock prices, industry reports
Deal comparisons: pricing, after issue performance
Executive Summary
League table
For marketing purposes
For internal purposes
For performance evaluation
4
...


6
...


Sales
a
...
Spending all day talking to clients
c
...
Need to be able to handle rejection and have soft skills
Trading
a
...
Makes deal with market counterparties
c
...
Publishes opinions
Other Key Players : Research, Credit, Risk Management, ALCO

CHAPTER 7
Definition of Insurance
Insurance provides indemnification against loss or liability from specified events and circumstances which may occur or be discovered during a specific
period (FASB113)
The essence of insurance if the transfer of risk from the insured to one or more insurers
Insurance companies are financial intermediaries who collect premiums and invest them in securities and other financial assets
Insurance Policy: benefit provided by a particular kind of indemnity contract
Insurer: issued by one of several kids of legal entities
Policyholder or Insured: in which the insurer promises to pay on behalf of or to indemnify another party
Insurance premium: that protects the insured against loss caused by those perils subject to the indemnity in exchange for consideration
Fundamentals of Insurance → seven basic principles all insurance companies are subject to
1
...
The beneficiary must be someone who would suffer if it weren't for the insurance
b
...

c
...
The insured must provide full and accurate information to the insurance company
a
...
The insured is not to profit as a result of insurance coverage
a
...
If a third party compensates the insured for the loss, the insurance companies obligation is reduced by the amount of compensation
a
...
The insurers simply contribute to make up the amount payable as if only one policy
was issued
5
...
The insurance company must have a large number of insured so that the risk can be spread among many different policies
b
...
Calculable loss: the loss must the quantifiable
a
...
The insurance company must be able to compute the probability of the loss occurring
Why get Insured?
Premiums are likely to be more than the expected loss
If there is no insurance, need to set aside reserves for losses, reserves cannot be invested long term as need to be immediately accessible in case of loss
(liquidity) → low return, worry that level or reserved may not be adequate to cover the loss
Most people are risk-averse : they would rather pay a certainty equivalent (the insurance premium) than accept the gamble that they will lose their
house/car → insurance allows a peace of mind that a single event can have only a limited financial impact
Trade-off : cost of premium vs
...
Underwriting : the process by which insurers select the risk to insure and decide how much in premiums to charge for accepting those risks
a
...
A combined
ratio <100% indicates underwriting profitability, which anything over 100 indicates an underwriting loss
...
Investing : the premiums they collect from insured parties
a
...
Float : or available reserve is the amount of money, at hand at any given moment, that an insurer has collected in insurance premiums but has
not paid out on claims
Insurance Industry Organization
1
...
Independent agents may sell the insurance products of a number of different insurance companies
b
...
Nowadays most insurance companies use multip[le distribution channels, including banks, professional organizations and market places
d
...

Bancassurance)
2
...
Claims
a
...
Life Insurance: pays off if the insured dies
a
...
Whole life : similar to term life, but allows the policyholder to borrow against the policies cash value
...
Universal life/Endowment Life/ Variable Life : includes both a term life portion and a savings portion (savings component)
2
...
Annuities: pays a benefit to the insured until death, to cover retirement years
Life insurance companies can provide retirement benefits as well as life insurance : source of convergence of financial institutions
Three basic classes
1
...
Group life
3
...
Sales of annuities
2
...
Accident and health insurance
Annuities represent the reverse of life insurance
...

Health Insurance
Health insurance policies are highly vulnerable to the adverse selection problem
Those with known or expected health problems are more likely to seek coverage
This is why most health insurance is offered through group policy
...
Property insurance : earliest form of insurance; protects businesses and owners from the rosh associated with owning property
...
Named-Peril policies : insurers against any losses only from perils specifically names in the policy (eg
...
Open-Peril policies : insurers against any losses except from perils specifically names in the policy (eg
...
Casualty/Liability Insurance : protects against financial losses because of a claim of negligence (eg
...
In the US liability premiums have risen considerably due to litigation (juries awarding high liability awards)
Reinsurance → Insurance for insurance companies
Allocated a portion of the rish to another company in exchange for a portion of the premium
Started in 17th century with Lloyds of Londons
Key Issues in Reinsurance
Impact of catastrophic losses such as Katrina
One of the recent trends has been the crossover from reinsurance into capital markets (catastrophe bonds, mortality bonds) with growing role of hedge
funds as investors
From insurance to capital markets : convergence product : ILS
Insurance Linked Securities (ILS) are fixed income securities through which the insurance industry on pure insurance risk to the financial markets
They are issued by insurance and reinsurance companies as protection in the event of extreme insurance losses, for instance following severe natural
catastrophes or a potential pandemic disease outbreak
The risk assumed by investors is related to a specific insurance loss (such as earthquake, mortality and airplane crash)
Prior to the maturity of a cat bond, two scenarios may develop
As long as nmo major natural catastrophes have occured, cat bonds are redeemed at 100% on the maturity date
Alternatively, if a catastrophic event of a predefined preil and within a specific region does occur, the bonds may default, and part of all the
capital is immediately transferred to the insurance buyer under the bond
...
The IA has fully taken over the supervision of insurance intermediation from the SROs
Organization structure of the IA
Industry Advisory Committee on Long Term
Business
Industry Advisory Committee on General Business

Insurance Authority

Corporate Services Committee

Chief Executing Officer

External Relations Committee

Long term business
General business
Market conduct
Policy & Development
Corporate services

Audit Committee
Investment Committee

Current Issues in Insurance
Growth of insurance in Asia
The rise of InsurTech : automation, digitization, virtual insurance, increased competition from China
IFRS 17 and other accounting changes
Solvency II and regulatory changes
Pension and Retirement Funds
Multi-Pillar Retirement System
In 1994, the World Bank recommended a three-pillar framework to address the issue of old-age protection; this was expanded to a five-pillar framework in
2005 based on operational experience
Public
Pillar 0
-

Private

A non-contributory, publicly financed and managed system that
provides a minimal level of protection for retirement

Pillar 2
-

A mandatory, privately managed, fully funded contribution system

Pillar 3
-

Voluntary savings (eg
...
family support), other formal social programmes (eg
...
home ownership)

Pensions in the US
Definition : a pension plan is an asset pool that accumulates over an individual's working years and is paid out during the norworking years
Developed as Americans began relying less on children for care during their later years
Also became popular as life expectancy increased
Defined Benefits vs
...
Annual retirement payment = 2% x average of final 3 years income x years of service

Defined- Contribution Pension Plan
A plan where a set amount is invested for
retirement, but the benefit payout is
uncertain

Places a burden on the employer to properly fund the expected retirement benefit payouts
Fully funded : sufficient funds are available to meet payouts
Overfunded : funds exceed the expected payout
Underfunded : funds are not expected to meet the required benefit payouts
US - Public Pension Funds
A pension plan set up or sponsored by a government body; funds administered by a federal, state or local government
...
State or local government pension funds
a
...
Funded on a “pay as you go” basis
i
...
Future generations will be called on to pay benefits to current
contributors
c
...
Federal government pension funds - two types
a
...
Social security
i
...

Projected number of workers is falling while projected number of retirees is increasing, which will cause problems in years to come if
not corrected
iii
...
insurance company, mutual funds)
Increasingly dominated by defined contribution plans
Types of private pension plans
401(k) and 403(b): employer sponsored plans that supplement a firm's basic retirement plan
Individual retirement accounts (IRA’s) and Roth IRAs
Keogh accounts (for self employed and SME employees)
US Regulation of Pension Plans
1
...
The number of plans increased from this as a unions negotiated for such plans
2
...
Does not mandate that employers establish pension fund for employees
b
...
Allowed plan credit to transfer with employees
d
...
Increased disclosure requirements
f
...
Also established the Pension Benefit Guaranty Corporation : to insure pension benefits if an underfunded pension plan is unable to meet its
obligations
i
...

May be in trouble as plans appeared underfunded

3
...


Pension Reform Act of 1978 authorized individual retirement accounts (IRAs)
a
...
Keogh plans are similar plans for self-employed individuals
c
...
Strengthens the federal pension insurance system
b
...
Makes permanent tax breaks or retirement plans and accounts which were scheduled to expire in 2010 permanent
d
...
Permits 401(k) and similar plans to offer investment advice
f
...
Employees are allowed to transfer their accrued benefits, eg
...
6% every year
65+ : all MPF benefits will be invested in the Age 65 plus fund
Fee controls : management feed capped at 0
...
a
...
critical illness, hospitalization cash, etc
...
Liquidity Intermediation : investors can quickly convert investment into cash while allowing the fund to invest for the long term
2
...
Diversification : investors immediately realize the benefits of diversification event for small investment
4
...
Managerial expertise : many investors prefer to rely on professional money managers to select their investment
Disadvantages of Collective Investments
1
...
Lack of Control : investors typically ascertain the exact make-up of a fund’s portfolio at any given time, nor can they directly influence which securities the
fund manager buys and sells or the timing of those trades
3
...
In general, mutual funds must calculate their NAV at least once every
business day, typically after the major U
...
exchanges close
Distinguishing Features of Mutual Funds
Investors purchase mutual fund shares from the fund itself or through a broker for the fund instead of from other investors on a secondary market, such as
the New York Stock Exchange or Nasdaq Stock Market
The price = the fund’s per share new asset value (NAV) + any shareholder fees that the fund imposes at the rime of purchase (such as sales loads)
Mutual fund shares are “redeemable”, meaning investors can sell their shares back to the fund (or to a broker acting for the fund)
Mutual funds generally create and sell new shares to accommodate new investors
...

Price for the shares is determined by supply and demand forces

Open-End Fund:
Investors may buy or redeem shares at any point, where the price is
determined by the net asset value of the funf

The Organizational Structure of a Mutual Fund
Shareholder
Mutual Fund
Board of Directors of Trustees
Oversees the funds activities, including approval of the contract with the management company and certain other service providers
Investment Advisors

Principal Underwriter

Administrator

Transfer Agent

Custodian

Manages the funds
portfolio according to
the objectives and
policies described in the
funds prospectus

Sells fund shares, either
directly to the public or
through other firms (eg
...
Mutual Funds
Unit Trusts

Mutual Funds

Form of establishment

Trust

Limited liability company

Beneficiary

Unit holder

Shareholder

Governing law

Trust law

Company law

Legal document in which the rules are laid
down

Trust deed

Company's Articles/bylaws and custodian
agreements

Who protects investors interests

Trustee

Custodian (but accordion to the custodian
agreement and articles/bylaws)

Who own or holds the fund assets

Trustee holds the assets for the benefit of the
investors

The mutual fund company own the asset and
investors are shareholders of the company

Who is liable

Trustee

The company has limited liability; directors can be
liable

Types of Mutual Funds
Mutual Funds
Short Term

Medium/Long Term

Taxable MMF, Tax-Exempt MMMF

Bond Funds, Equity Fund, Index Funds, Hybrid Funds, Specialized Funds

Money Market Mutual Funds
Money market funds are a type of mutual fund registered under the Invest Company Act of 1940 and regulated under rule 2a-7 of the Act
Money market funds pay dividends that reflect prevailing short-term interest rates, are redeemable on demand, and, unlike other investment companies,
seek to maintain a stable NAV, typically $1
...
This combination of principal stability, liquidity and payment of short-term yields has made money market
funds popular cash management vehicles for both retail and institutional investors
...
3 trillion, the highest level on record, according to data from Refinitiv Lipper going back to 1992
...
8 trillion reached
during the last financial crisis
MMF vs
...
Money market fund : is a type of mutual fund
...
When you buy shares in a money market fun, you should receive a
prospectus
2
...
It is guaranteed and FDIC insured
...
The
amendments tighten fund liquidity requirements, impose stricter quality requirements, address reliance of rating agencies, impose stricter maturity limits,
require enhanced disclosure of portfolio holding and address issues that arise when a MMF experience market challenges
Funds that meet Rule 2a-7’s risk-limiting provisions are allowed to value their securities at amortized cost, rather than at market value
...
0) under a wide range of market conditions
Regulation of MMMF
1
...
Liquidity : all taxable funds must maintain 10% of assets in “daily liquid assets”, which means cash, U
...
Treasuries, or securities that mature or are
subject to demand feature within one business day
...
S
...

3
...
The limit is set at 0
...
Maturity : Money market funds cannot acquire a portfolio security with a remaining maturity of greater than 397 days
...
These funds no longer will be allowed to use the special pricing and valuation convention that used
to permit them to maintain a constant share price of $1
...
For example, an S&P 500 index fund would hold the quities comprising the S7P 500
Offer benefits of traditional mutual funds without the fees of the professional money manager
Exchange Traded Funds (EFTs)
Are investment funds generally designed to track a particular index (generally stock index eg
...
They can be either open-end companies or
UITs
...

Key Issues with ETFs
Because shares in ETFs are traded like stocks, the prices reflect supply/demand not just the underlying value of the funds assets
Just like stocks, it is possible to buy options on ETFs or go short ETFs
As a result, in days of volatile trading, the price of an ETF can diverge chrome the price of the assets it is tracking
ETF investors who sell in volatile market may get significantly less than the assets they are worth
Problems with synthetic ETFs where investors take risk on the ETF provider
Mutual Fund Prospectuses and Objectives
In the US, SEC regulations require mutual fund managers to specify the investment objectives of their funds in a prospectus
A mutual funds statutory prospectus describes the funds investments goals and objectives, fees and expenses, investment strategies and risks and
informs investors how to buy and sell shares
Mutual funds and ETFs may elect to provide investors with a short “summary prospectus” containing certain key information instead of the full statutory
prospectus
...
It is referred to as class C shares
Fund operating Expenses
Calculating a Mutual Funds Net Asset Value (NAV)
NAV is the number market value of al the funds assets, minus liabilities (eg
...
It does NOT include dealing costs, entry or exit
fees (front end and back end loads) or performance fees
...
Dividend Payments : a fund may earn income in the form of dividends and interest on the securities in its portfolio
...

2
...
When a fund sells a security that has increased in price, the fund has a
capital gain
...
Increased NAV : if the market value of a fund's portfolio increases after deduction of expenses and liabilities, the value (NAV) of the fund and its shares
increases
...
Regulation : protection of investors ordinance; Regulator : the SFC; SFC’s Code on Unit Trusts & Mutual Funds detail the requirements applicable to such
schemes in Hong Kong
2
...
Regulators focus on shadow banking possible systemic role
a
...
Capital reserve requirement
2
...
ETFs vs ETPs - the issue of counterparty risk
b
...
Performance and returns
a
...
The great rebalancing

CHAPTER 8
Sovereign Wealth Funds (SWF)
SWFs are special purpose investment funds or arrangements, owned by the general government
...
SWFs assets are commonly established out of balance of payment surpluses, official foreign currency operations, the proceeds of privatizations and
fiscal surpluses
...
Ownership : SWFs are owned by the general government, which includes both central government and subnational governments
...
Investment : the investment strategies include investments in foreihgn financial assets, so it excludes those funds that solely invest in domestic assets
...
Purpose and Objectives : Establishes by the general government for macroeconomic purposes, SWFs are creates to invest government funds to achieve
financial objectives and may have liabilities
Concerns about SWFs
Size and market impact
Growth of sector
Political issue : national security concerns and protectionism
Disclosure and transparency :
The International Working Group of Sovereign Wealth Funds (IWG) was formed in May 2008, with the IMF providing support in the form of a
secretariat
In October 2008, the Group published a set of 24 voluntary Principles, the Generally Accepted Principles and Practices for Sovereign Wealth
Funds, known as the Santiago Principles
The IWG reached a consensus in April 2009 on the establishment of the International Forum of Sovereign Wealth Funds to follow up on the work
undertaken in the context of Santiago Principles
...
Individuals - not funds
b
...
Typically HNWo and successful entrepreneurs
d
...
Motivation generally beyond pure financial returns
f
...
Typically very early stage investing: seed money, start-ups
Venture Capital
Money provided by professionals who invest alongside management in young, rapidly growing companies that have p[otential to develop into significant
economic contributors
...
1

M&A

Co
...
8 of proceeds

Paid y%*
...
3

2nd Market

Co
...
The funds raised through private equity can be used to
develop new products and technologies, to expand working capital, to make acquisitions or to strengthen a company's balance sheet
By extension, any investment in equity other than publicly listed equity
Currently private equity refers to mainly by-out funds
Pricing in private markets is different than public markets as there through be a premium for illiquidity → PE should be more expensive
Private Equity Industry
Strategy

Focus

Venture → Growth → Buyout →
Distress → Mez → Venture

Organization

Control → Global → Regional →
Country → Sector → Control

Level

Partnership → Dictator → Corporate
→ Partnership

Direct → Secondary →
Funds-of-funds → Direct

Private Equity: Fee Structure and performance
Fee Structure
High “friction costs” (various fees, operating costs and inefficiencies that reduce return on investment) of around 11% per year
Typical fee structure:
2% fee of committed capital and 4% on average invested capital
20% of profits
Acquisition fees, disposal fees, fees charged to companies and legal fees add probably another 2%
However leverage reduces the impact of friction costs
Private Equity Glossary
1
...
Also called LBO or buyout, this is a strategy financial sponsors employ to acquire a majority state in a company, business unit or business assets
from the current shareholders, typically using a combination of equity and debt
...
Venture Capital
a
...
Venture investing is most often found in
the application of new technology, new marketing concepts and new products that have yet to be proven, and it's usually involves acquiring a
minority stake in the business
3
...
This is an equity investment made most often to acquire a minority position in a relatively mature company that is looking to expand or
restructure operations, enter new markets or finance a major acquisition without credit control of the business
4
...
Distressed, or special, situations are a broad category referring to investments into financially troubled companies
...
Investors may also provide “rescue financing”
typically a combination of debt and equity to companies undergoing operational or financial challenges
...

additional markets or
product/service offerings)

Covers need to restructure
financing in preparation for
listing on the stock exchange
...
Types include :
Management Buyouts (MBO)
Leveraged Buyouts (LBO)
Management Buy In (MBI)
Or a combination of all three

Also an endorsement by a
reputabl;e venture capital firm
will attract greater investors

Startup

Development

Buyout

Private Equity's J-Curve
Investors chip-in capital calls early during fund lifecycle: distributions typically come during mid-to-later years
Investment Process
1
...
Evaluate RFF (request for financing) and business plan
b
...
Initial Negotiation : Discuss and negotiate general terms and structure of investment with entrepreneur/company before submission to investment
committee for approval
3
...
Sign Memorandum of Understanding (MOU)
b
...
Final Negotiation and Completion
a
...
Legal documentation to be signed
5
...
Exit : Generally 3-5 years initial investment by IPO or to strategic partner
The VC Pipeline
10 Investments
50 Due Diligence
500 Face to face meetings

1% Investment
rate

1,200 Initial Reviews
(network introductions, conferences, in-bound inquiries, proactive efforts, portfolio company referrals and seed investors)
Top 20 Reasons Startups Fail
No market need, ran out of cash, not the right team, get outcompeted, pricing/cost issues, poor product, lack business model, poor marketing, ignore
customers, product mis-times, lost focus, disharmony on team, pivot gone bad, lack passion, bad location, non financing, legal challenges, don't use
network, burn out, failure to pivot
The Life Cycle of a PE Fund
According to Blackstone's Private Wealth Solutions group, the life cycle of PE funds is typically 7 to 10 years, and is generally broken down into three stages: the
fundraising period, the investment period, and the harvest period
...
This period typically lasts two years
...

Some examples of definitions:
“A limited partnership, which can take long and short positions, use leverage, and pay the manager (principal partner) 20% of the profit
...
Soros
“All investment funds with an absolute return goal” - TASS
“A risky investment pool, generally open only to well-heeled investors, that seeks very high returns by taking very great risks” - MoneyCentral Investor
What is a Hedge Fund?
A hedge fund constitutes an investment program whereby the managers or partners seek absolute returns by exploiting investment opportunities while
protecting principal from potential financial loss
...

It's perceived as a misnomer because there are no hedge funds that hedge all risks
...
Their investment philosophy is materially different from the investment philosophy of a manager
who is tried to a market benchmark
...
The universe of alternative
investment is just that - the universe
Hedge Fund Characteristics
Actively manages - returns driven by manager skills (“alpha”)
No benchmarks, no relative weights, no relative returns
Flexible investment policies
Often located “offshore”
Limited liquidity
Performance fees - the 2+20 system
Run by partners, not employees
Secretive
Who are the investors
Originally, investors were HNWI and family offices
Over time, the role of institutional investors has increased
The flow of money from institutions due to the search for yield post-GFC
Recently, under-performance has caused many withdrawals from key investors, particularly US pension funds

Key Features of Hedge Funds
1
...
Fee Structure: 2/20: management fee and performance fee, hurdle rate, high water mark
3
...
Strategy diversity: global macro; directional (including long/short); event driven; relative value
HF Glossary
1
...
Beta : Gauges the risk of a fund by measuring the volatility of its past returns in relation to the returns of a benchmark, such as the S&P 500 index
3
...
A provision serving to ensure that a fund manager only collects incentive feed on the highest net asset value previously attained at the end of
any prior fiscal year - or gains representing actual profits for each investor
...
A high water mark means, where the net asset value (NAV) of the fund drops below its peak, no performance fee can be charged on any
subsequent profit until the NAV reached its previous high
4
...

The minimum return necessary for a mund manager to start collecting incentive fees
...
The deployment of a hurdle rate in a hedge fund means that a hedge fund manager cannot charge a performance fee until the funds
performance exceeds a pre-determines target
i
...
if a fund sets a hurdle of 5% and returns 15%, performance fees would only apply to the 10% above the hurdle
...
1% and 10%) or an index based benchmark (LIBOR or LIBOR plus a spread)
5
...
Management fee
a
...

b
...
5% - 2% of an investors entire holding in the fund, usually collected on a quarterly basis
7
...
The committed capital gives greater freeform to the hedge fund manager who does not
need to hold as much cash on hand to meet potential redemption requests
Funds of Hedge Funds
Relatively new type of investment product, are investment companies that invest in hedge funds
Some register with the SEC and file semi-annual reports
Often have lower minimum investment thresholds than traditional, unregistered hedge funds and can sell their shares to a large number of investors
Not mutual funds
Offer very limited rights of redemption
Shares not typically listed on exchange
In you invest, you will pay two layers of fees: the fees of the fund of the hedge funds and the fees charged by the underlying hedge funds
Current Issues about Hedge Funds
1
...
Need for regulation of HF
i
...

New regulations post-crisis: Dodd-Frank Act 2010 and Private Fund Investment Advisers Registration Act of 2010 (US); Alternative
Investment Fund Directive 2010 (EU)
b
...

Are HFs the new mutual funds?
c
...
Impact of Madoff scandal: are HFs just a Ponzi scheme?
a
...
Impact on results and performance
3
...
residual claim once all debt has been paid
There are different classes of shares: common shares and preferred share, founders shares
Different rights in respect of voting, dividends, claim on net assets
Stock Price Quote
D = dividend paymen
EPS = earnings per share
P/E = price to earnings ratio Mkt Cap = market capitalization
Shareholder Votes and Shareholders Meetings
Annual Meeting : once a year shareholders vote on directors and other proposals and ask managers questions
...
Straight voting: shareholders vote for each director separately, with each shareholder having as many votes as shares held
2
...
6Bn and valuing the company at $24bn
The price popped up to $24
...
Cumulative : where all missed dividends much be paid before any common dividends can be paid
2
...
Only the current dividend is owed before common dividend can be paid
Equity or Debt?
Generally no voting rights
- Priority over common shareholders for payment of dividends and in liquidation
Behind bondholders and creditors in liquidation
- Dividends paid after tax (US)
The Mechanics of Stock Trades
Market Order = order at market (no specified place)
Limit Order = order at specific price
Round Lot = 100 shares
Most exchanged today fully electronic; NYSE is only of the very few that still has floor trading: specialists (market makers) holding trading licenses and
make markets in some securities: floor brokers represent customers orders on the floor
Equity Valuation: The Dividend Discount Model

𝑃0 =
DDM
-

𝐷𝑖𝑣1 + 𝑃1
1 + 𝑟𝐸
With a 1 year time horizon, an investor buys a listed stock today (time=0) at market price P0, gets a dividend Div1 after 1 year and then sells the stock at
market price P1
So the cash flow consists of Div1, dividend and P1, the sale price of the stock
- Discounting the cash flows with the expected return rE

Dividend Yield : expected annual dividend of a stock divided by its current price = % return an investor expect to earn from the dividend paid by the stock
Capital Gain : the amount by which the sel;ling price of the stock exceeds the purchase price
Capital Gain Rate : capital gain as % of initial price of the stock
Total Return: stocks dividend yield plus capital gain rate
𝐷𝑖𝑣1 + 𝑃1
𝐷𝑖𝑣1
𝑃1−𝑃0
𝑟𝐸 =
− 1 = 𝑃0 +
𝑃0
𝑃0
rE = dividend yield + capital gain return = total return
If expected dividend yield + expected capital gain return ≥ expected return (hurdle rate) of the investor, then the investor should buy that stock
With two years:
𝐷𝑖𝑣1 + 𝑃1
𝐷𝑖𝑣2 +𝑃2
𝑃0 =
+
2
1 + 𝑟𝐸
(1+𝑟𝐸)
-

Buying a stock at P0 and selling at Pn in the year n, collecting dividends in between, the DCF formula applies

Constant Dividend Growth
When the dividend growth g is
constant, the DCF calculation is
simpler
Simplified calculation lead to the
Constant Dividend Growth Model
(when rE > g):

𝑃0 =

𝐷𝑖𝑣1
𝑟𝐸 − 𝑔

Limitations of the DDM
1
...
Uncertain Dividend Forecasts: The DDM model values a stock based on a forecast of the future dividends, but a firm's future dividends carry a tremendous
amount of uncertainty
* Remember to question the assumption when doing forecasts
DDM - What To Keep In Mind
Constant growth model formula applier only when rE > g
The expected return from a stock investment over 1 year is 𝑃0 =
-

𝐷𝑖𝑣1
𝑃0

+𝑔

For listed companies there is a trade-off between increasing dividends and growth rate, assuming unchanged earning, it depends on

-

Dividends payout rate and
- Number of shares outstanding (share repurchases)
For stocks with uncertain dividend or paying no dividend, DDM is of limited help

CHAPTER 10
Goals of Financial Regulation
1
...
Because financial institutions incentives to maximize profits can in some cases lead to sales of unsuitable or fraudulent financial products, or
unfair or deceptive act or practices, US regulators take steps to affreed informal disadvantages that consumers and investors may face, ensure
consumers and investors have sufficient information to make appropriate decisions, and oversee business conduct and sales practices to
prevent fraud and abuse
2
...
Because some market participants could seek to manipulate markets to obtain unfair gains in a way that is not easily detectable by other
participants, US regulators set rules and minotaur markets and their participants to prevent fraud and manipulation, limit problems in asset
pricing, and ensure efficient market activity
3
...
Because markets sometimes lead to financial institutions to take on excessive risks that can have significant negative impacts on consumers,
investors and taxpayers, regulates oversee risk-taking activities to promote the safety and soundness of financial institutions
4
...
Because shocks to the system or the actions of financial institutions can lead to instability in the broader financial system, regulators act to
reduce systemic risk in various ways, such as by providing emergency funding to trouble financial institutions
Fair And Effective Markets
1
...
Enabling investment, funding and risk transfer; underpinned by robust infrastructure
b
...
Fair
a
...
Transparency
c
...
Competition on the basis of merit
e
...
Bank supervision: licensing/chartering and bank examination
2
...
Restrictions on asset holdings
4
...
Prudential ratios
a
...
Capital requirements (Basel guidelines)
6
...
Deposit insurance
b
...
Disclosure Requirement
a
...
Stringent reporting requirements for financial intermediaries
i
...

Their books are subject to periodic inspection
iii
...
Consumer Protection
a
...

Truth in Lending Consumer Protection Act 1969 and Fair Billing Act 1974 → full disclosure of exact financing term on comparable
basis (annual percentage rate APR)
b
...

Equal Credit Opportunity Act 1974/1976 and Community Reinvestment Act 1977 → Prevent discrimination and redlining
Restriction on Competition
Branching restrictions, which reduced competition between banks
Limits on interstate branching
Separation of banking and securities industries: Glass-Steagall Act
Preventing nonbanks from competing with banks
Restriction on Assets Holdings
Restrictions on banks assets holding and activities are designed to reduce moral hazard by preventing banks from engaging in risky activities
Types of restrictions include
Restrictions on holding certain assets
Eg
...
concentration limits)
Liquidity requirements: Most regulators require some form of liquidity or serve requirements such as:
Reserve requirement : in the US, banks are required to hold 10% of the amount of transaction deposits in cash or in reserves at the Fed
Liquidity ratio : in HK, there is no reserve requirement but banks have to maintain Basel III liquidity ratio (LCR and NSFR)

Prudential Ratios - Capital Requirements
Banks are required to hold a certain level of capital (book equity) that depends on the type of assets that the bank holds
Reduce moral hazard
In the US, higher capital means more collateral for FDIC
3 types of Capital requirement in US
1
...
Capital adequacy tattoo = capital/(total risk weighted assets & other risk-related exposure) >8% with “core”(or tier1) capital >4%
3
...
FDIC has to take prompt corrective action of groups 3-5
Capital Adequacy Ratio “BIS ratio” Basel I
Banks in all participating nations must have a minimum Capital Adequacy Ratio (CAR) of total capital to sun of risk-weighted assets and other related risk-exposed
items of 8%

𝐶𝐴𝑅 =

𝐶𝐵
𝑅𝑊𝐴

≥ 8%

CB = Capital Base
RWA = Risk Weighted Assets
1
...
Tangible equity including common stock
b
...
Surplus plus retained earnings
d
...
Capital reserves less intangibles
2
...
Subordinated capital notes & debentures > 5 years to maturity
4
...
Loan loss reserves
Risk Weights

Four Categories

0
...

Eg
...
20

Some degree of minimal risk
Eg
...
50

Secured/collateralized loans
Eg
...
00

Maximum degree of risk
Eg
...
OECD
government : 0%)
Calculating the BIS Ratio
Calculating Risk-Adjusted Requirements
Calculate Based I (BIS) Ratio
1996 Market Risk Amendment
Set minimum capital requirements for risks in banks trading accounts (effective from 1998)
Capital requirements for large banks that have substantial trading businesses adjusted to incorporate general market risk
Capital requirement are based on banks own assessment of risk when applying a value-at-risk (VAP) model and generally complemented by stress-testing
The Second Basel Capital Accord (Basel II)
1
...
Proposal June 1999 to expand and revise the 1988 accord in 4 main areas
a
...

Credit ratings are the result of continuous assessment of a borrowed solvency
...
It can be internal (by banks) or external (rating agencies or credit insurers)
b
...
Internal management procedures subject to supervisory review
d
...
2 new objectives added in revised proposal
a
...
Promote market discipline by way of improved disclosure
4
...
Basel II aims to relate the capital requirement not only to the amount of risk that banks
undertake, but also how well they manage that risk
a
...
Basel II adopted a “3 Pillar” structure
a
...
Pillar 2: deals with other risks not covered under Pillar 1; requires banks to hold capital to cover these risks; and requires supervisors to review
banks capital planning
c
...
JP Morgan reports $1
...
5 billion on its balance sheets
International rules require banks to show gross derivative values on their balance sheet with less netting allowed
...

Basel III - New Leverage Ratio
On 17 December 2009, the BCBS released a paper with the following two ratios
1
...

Outflows can only be met by generating liquidity from high quality government bonds and central bank deposits
2
...
Basel II)
Ability of banks to raise substantial amount of capital in crisis (eg
...
asian market do not offer deep pools of liquid assets to use for liquidity coverage ratio
Significant impact of Basel rules on entire sectors such as trade finance, project finance, securitization
Based IV and the “floor” to RWA
Important Other Regulatory Issues
Trump administration de-regulatory push and the regulatory pendulum
IFRS 9 implications- “fair value” accounting
IBOR transition
Balkanisation of regulation?
Government Safety Net: Deposit Insurance and Lender of Last Resort
Deposit insurance provides protection for the depositor and can increase
confidence in the banking system
Can create moral hazard if implemented in an environment with
weak instructions
Problem of “too big to fail” doctrine

Another form of government safely net is government support to depository
institutions
Significant moral hazard
Common in many emerging market
Current issue: bank ratings

Funding or liquidity support by the government can take three forms
1
...
Lender of last resort support to banks experiencing funding difficulties on a short term basis
3
...
He is also responsible for maintaining the
Stability and integrity of the monetary system of HK
The Monetary Policy Strategy of HK is currency stability
...
1 million accounts in use (+12
...
1% yoy)
SVF licenses continue to extend their business reach
Eg
...


PBOC

The People's Bank of China, assumes responsibility for drafting key regulations
and prudential oversight in banking and insurance to address systemic risk

CIRC
CBIRS

The insurance regulator, the China Insurance Regulatory Commission, and the
baking regulator
...
Conducting the nation's monetary policy by influencing money and credit conditions in the economy in pursuit of full employment and stable prices
2
...
Maintaining the stability of the financial system and containing systemic risk that may arise in financial market
4
...

The banks as “quasi-public”; they are not government agencies nor private banks
Owned by member commercial banks in the district, who collect a 6% dividend
Fed Bank presidents are not subject to congressional confirmation (designed to promote independence from politicians)
Member banks elect six directors, while three directors are appointed by the Board of Governors
Directors represent professional bankers, prominent business leaders and public interest (three from each group)
Class A directors are elected by member banks and represent them
Class B directors are elected by member banks but represent the public; they cannot be officers or directors of banks
Class C directors represent the public but are picked by the Fed (Board of Governor); they cannot be officers or directors of banks and cannot own shares
of banks or bank holding companies
Current issue: conflicts of interest at the Fed: composition of the board of the NY Fed raises issues or corporate governance - Jamie Dimon urged to resign from the
board (June 2012)
The Federal Reserve Bank of New York
Largest bank supervision group in the Fed system: Fed district of NY is home to some of the largest banks in the world
Houses the open market trading desk and the FX desk → key role in bond and FX markets
Only Fed bank to be a member of the BIS → NY Fed president together with Chairman of BOG represents the Fed at regular meetings with other central
banks
Repository of large gold reserves (bigger than Fort Knox)
President of NY Fed is the only permanent member of the FOMC
Federal Reserve Bank Functions
General
-

Act as fiscal agent for the Federal Government
Clear checks, process electronic payments and issue,
redeem and transfer US TSY securities
Issue currency
Check processing for depository institutions
Electronics payment (ACH)
Evaluate bank mergers and expansions
Lender to member banks
Liaison between local community and the Federal Reserve System
Perform bank examinations

Monetary Policy
-

Establish the “discount rate” at which members banks may borrow
from the Federal Reserve Bank (subject to BOG review)
Determine which banks receive loans
Elect one member to the Federal Advisory Council
Five of the 12 bank presidents vote in the Federal Open Market
Committee

Member Banks
All national banks (banks chartered by the Office of the Comptroller of the Currency) are required to be members
State commercials banks may elect to join but are not required to
Prior to 1980, only member banks were required to maintain reserves as deposits with the Federal Reserve Banks
...
regulation Q)
Chair of the Federal Reserve System
Spokesperson for the entire Federal Reserve System
Negotiates, as needed, with Congress and the President of the US
Sets the agenda for the FOMC meetings
With these, the chair has effective control over the system, even though he doesn't have legal authority to exercise control over the system and its member
banks
Jerome Powell was confirmed as Chair of the Fed on February 5 2018, for a four-year term
...
The chair of BOG is also the chair of this committee
Makes decisions regarding open market operations, to influence the monetary base
FOMC key focal point of t he policymaking of the Fed given the key role of open market operations
Meet either times a year (every six weeks)
Important agenda items include
Reports on open market operations (foreign and domestic)
“Go-round” and review of green, blue and beige books
Discussion of monetary policy and directives, including views of each member
Formal policy directive mode
Post-meeting announcements, as needed
FOMC issues directives to the trading desk a the Fed Bank of NY where open market operations are executed
How Independent is the Fed?
2 aspects of central bank independence
Instruments independence : the ability of the central bank to set monetary policy instruments
Goal Independence : the ability of the central bank to set the goals of monetary policy
Most economists argue that the Fed is free along both dimensions, although some disagree
Normally, the 14-year terms (non-renewable) limit incentives to curry favor with either the President or Congress
The Fed is usually generates revenue in excess of its expenses, so it is not typically under appropriations pressure
However, Congress can enact legislation to gain control of the Fed, a thread wielded as needed
...
They are appointed by the European Council,
acting by a qualified majority
The Governing Council is the main decision-making body of the ECB; it formulates monetary policy for the euro area
The most instrument and goal independent central bank in the world
...
The MPC meets at least monthly
Like FOMC consists of the governor, deputy governors, two of the Banks Executive Directors, plus four members appointed by the Chancellor
Bank of Canada
Founded in 1934
Directors are appointment by the government for three-year terms and they appoint a government for a seven-year term
A governing council is the policy-making group comparable to the FOMC
In 1967, ultimate monetary authority was given to the government
...
All serve five-year terms
The Bank of Japan Law (1998) gave the Bank considerable instruments and goal independence
Japan's Ministry of Finance can exert authority through its budgetary approval of the Bank’s non-monetary spending
People's Bank of China
Established in 1948, became China's central bank in 1983
The Law of the People’s Republic of China on the People’s Bank of China was adopted on March 18, 1995 by the 3rd Plenum of the 8th National People’s
Congress
PBOC reports to the State Council and to the Standing Committee of the National People's Congress
The rop management of the PBC is composed of the governor and certain number of deputy governors
The governors of the PBC are appointed into or removed from office by the President of the People’s Republic of China
...
63% for depositors
Comparison of Asian Central Banks Monetary Policy Goal & Tool Sets
Hong Kong
Core Objectives (Goals)

China

Singapore

Currency stability under the Linked
Exchange Rate System

Economic growth,
Stable prices,
Increased employment,
BoP equilibrium,
Financial stability

Exchange rate stability

Independence

No

No

No

Regulator

Yes

Yes

Yes

Policy Tools Used In The
Millennium

-

Exchange funds bills (in
terms of tenders)
Base rate adjustments
Settlement facilities
(intraday Repo and
Discount window)
Regulated capital ratios

-

Tools deployed during
Covid-19

-

Reduced CCyB* by
1
...
2% to 5
...
Maximum employment :
a
...
The Fed seeks to mitigate shortfalls of employment from assessments of its maximum level
2
...
The FOMC seeks to achieve inflation that averages 2% over time
b
...

2
...
Primary Credit: policy whereby healthy banks are permitted to borrow as they wish from the primary credit facility
2
...
Seasonal Credit: designed for small, regional banks that have seasonal patterns of deposits
New: enhanced use of discount windows during GFC and pandemic to prevent liquidity crisis (TAF), broadened collateral, longer terms, wider coverage beyond
depository institutions)
Lender of Last Resort Function
1
...
Eg
...
To prevent nonbank financial panics
a
...
Bear Stearns and AIG bailouts (2008)
c
...
Advantages
a
...
Disadvantages
a
...
Raising causes liquidity problems for banks
c
...
Tax on banks
From 2009, the Fed can pay interest on bank balances held at Reserves Banks
In response to covid, the federal reserve reduced the reserve requirement ratio to zero across all deposit tiers, effective March 26 2020
...
Which principle of insurance most distinguishes insurance from derivatives?
a
...
Utmost Good Faith
c
...
Which principle of insurance explains why you can buy health insurance cheaper through your employer than individually?
a
...
Law of large numbers
c
...
How do insurance companies make profits?
a
...
Investing the float to generate income
c
...
None of the above
4
...
Ensuring that all Americans had health insurance
b
...
Ensuring that insurance companies were properly regulated in the US
5
...
Health insurance
b
...
D&O insurance
6
...
What will happen to investors if the
earthquake takes place (meeting the criteria of the bonds)
a
...
Investors will get the principal
c
...
Demographic trends and changes in retirement patterns suggest that Social Security funding problems will ease over the
next few decades
a
...
False
8
...
Fully funded pension pan
b
...
Government sponsored private pension plan
d
...
Which government entity regulates the pension sector in the US?
a
...
The SEC
c
...
If a private pension plan fails in the US, what happens to workers pensions?
a
...
Pension liabilities are taken over by the PBGC
c
...
The MPF is a
a
...
Defined contributions plan
12
...
Change their allocation choices within the employer plan
b
...
Transfer both their employers and their own contributions to another MPF plan
13
...
Take their contributions in cash at any time
b
...
Investors in mutual funds benefit most from denomination intermediation when they seek to invest in
a
...
Bonds
15
...


17
...


19
...


21
...


23
...


25
...


27
...


a
...
Costs irrespective of performance
c
...
All of the above
e
...
One of the metrics used to compare funds
is the TER (Total Expense Ratio)
...
Annual management fee
b
...
Administration and legal fees
d
...
The Euro spot price (EUR/USD) falls below 1 US
b
...
The NAV of a mutual fund exceeds $1 per share
In Hong Kong, the SFC is responsible for
a
...
Authorising offering documents of retail investment products
c
...
They don’t understand the products
b
...
They worry about systemic risk
Which is the largest institutional investor by AuM?
a
...
Alternative investors like Hedge Funds
When a life-long chain smoker attempts to purchase a life insurance policy, the insurance company faces the problem of
adverse selection
...
True
b
...
True
b
...
True
b
...
Fully funded pension plan
b
...
Government sponsored private pension plan
d
...
Provide more generous annual cost of living increases
b
...
Reduce the amount of future benefits
A Named Perils insurance policy insures against any losses
a
...
flood insurance)
b
...
homeowners insurance)
Which principle of insurance most differentiates insurance from derivatives?
a
...
Law of Large Numbers
c
...
Term life insurance

29
...


31
...


33
...


35
...


37
...


39
...
Annuity
c
...
Universal life insurance
A company’s pension plan promises employees a specific amount of income when they retire
...
This plan represents a defined - … plan that is …
...
Benefits; underfunded
b
...
Contribution underfunded
d
...
Charge higher premiums to people with certain pre-existing health conditions
b
...
Refuse to sell policies to people with certain pre-existing health conditions
d
...
Annuities
b
...
D&O insurance
d
...
None of the above
A mutual fund’s board of directors picks the securities that will be held and makes buy and sell decisions
a
...
False
If you were a board member of a Chinese company listed in the US, which type of insurance contract should you get to
cover risks related to your role on the board?
a
...
Term Life Insurance
c
...
Annuity
The MPF in Hong Kong is not:
a
...
Portable
c
...
Members choice
Which principle of insurance explains why you can buy health insurance cheaper through your employer than individually?
a
...
Law of Large Numbers
c
...
Paying out less in claims then they receive in premiums
b
...
Premiums less claims paid plus investment income less operational expenses
d
...
Ensuring that all Americans had health insurance
b
...
Ensuring that insurance companies were properly regulated in the US
One key issue for investors in collective investment funds is the costs involved
...
Which of the following costs is not included in the TER?
a
...
Dealing costs
c
...
Distribution fees
In the US “breaking the buck” refers to a situation where:
a
...
A money market mutual fund (MMMF)’s NAV (Net Asset Value) goes below $1
c
...
Imagine the HKSAR Government issues a Cat Bond linked to a severe earthquake
...
Investors will get the coupons and principal
b
...
Investors will get the principal plus sum insured
d
...
In Hong Kong, the SFC is responsible for
a
...
Authorizing offering documents of retail investment products
c
...
Why does the SFC (and other regulators) worry about the rapid growth of synthetic ETFs?
a
...
They worry that investors don’t realise they are taking counterparty exposure
c
...
Which of the below standards best protect investors?
a
...
Suitability assessment by financial advisors
44
...
Liquidity
b
...
Denomination
d
...
Mutual funds offer investors all of the following except
a
...
Diversified portfolios
c
...
Professional investment management
46
...
The most common structure is a(n) … fund, from which shares can be
redeemed at any time at a price that is linked to the asset value of the fund
...
Closed-end, open-end
b
...
No-load, closed-end
d
...
Load, no-load
47
...
They have lower fees
b
...
They do not require managers to select stocks and decide when to buy and sell
d
...
A defined-contribution plan promises employees a specific amount of retirement income
a
...
False
49
...
Determined by subtracting the fund’s liabilities from its assets and dividing by the number of shares outstanding
b
...
Calculated every 15 minutes and used for transactions occurring during the next 15 minute interval
d
...
In the case of an insurance policy, … occurs when the existence of insurance encourages the insured party to take risks
that increase the likelihood of an insurance payoff
a
...
Opportunism
c
...
Shirking
51
...
That increase benefits dramatically once the policyholder is discovered to have contracted an illness so that the
patient can recover sooner

52
...


54
...


56
...


58
...


60
...


62
...
Containing provisions which either reduce or eliminate benefits to persons who contract pre-specified illness
c
...
With only (a) and (b) of the above provisions
A whole life insurance policy pays a death benefit if the policyholder dies
a
...
False
Which of the following pensions does NOT promise employees a specific retirement benefit?
a
...
Defined-contribution plan
c
...
Underfunded plan
What kind of risk are regulators increasingly worried about in relation with the fund management industry, which the
Reserve Fund crisis and the more recent crisis have highlighted such as redemption gates?
a
...
Currency risk
c
...
Commodity risk
e
...
Prospectus
b
...
Fiduciary warrant
d
...
Individual pension plans
b
...
Corporate pension plans
d
...
Owned by the general government
b
...
Invests to achieve financial objectives
d
...
SEC
b
...
Department of Labor
d
...
Equator Principles
b
...
Basel Principles
d
...
Angel investing
b
...
PE fund
Your friend, who is in his final year of engineering studies at HKUST, has discovered a way of making tele-transportation
work
...
Which type of financial institution would you recommend he try?
a
...
A PE fund
c
...
A mutual fund
In 1989 a large conglomerate, RJR Nabisco, was taken over in a highly publicized hostile takeover involving substantial
amounts of debt by a financial firm named KKR
...


64
...


66
...


68
...


70
...


72
...


a
...
Seed investing by a venture capital firm
c
...
Closed-end mutual funds
b
...
Nonprofit businesses
A fund that invests in companies to take them private is typically called
a
...
PE fund
Fat Finger Capital Management manages a Global Macro hedge fund for Ultra HNWI with a 2/20 fee structure and high
watermark
...
At the end of the next year, due to EU
sovereign debt crisis and the reach of the U
...
At the end of
2012, as the severity of EU sovereign debt crisis subsides, the NAV rebounds to $90 per share
...
$20
b
...
$100
d
...
Organisational structure as partnership
b
...
High denomination
d
...
All of the above
f
...
High water mark
b
...
Alpha
d
...
Lock up rules
b
...
Long redemption periods
d
...
None of the above
If a private pension plan fails in the US, what happens to workers pensions?
a
...
Pension liabilities are taken over by the PBGC
c
...
Change their allocation choices within the employer plan
b
...
Transfer both their employers and their own contributions to another MPF plan
Which US regulator oversees the security industry?
a
...
The SEC
c
...
The FSB
Which is the equivalent to “the US regulator oversees the security industry” in the EU?
a
...
ESMA
c
...
BCBS
Which of the below is NOT a goal of financial regulation?

74
...


76
...


78
...


80
...
Ensure adequate consumer protection
b
...
Monitor the safety and soundness of financial institutions
d
...
Protect sophisticated investors
Which type of risk have regulators globally been trying to identify and manage through the set-up of the Financial Stability
Board and similar regional boards?
a
...
Systemic risk
c
...
Counterparty risk
What are CAMELS ratings and what are they used for
a
...
Credit bureaus and scoring agencies use this system to design credit scores for consumers
c
...
Central banks use this system in their examinations of banks to evaluate the risk of the bank
In the US, Reg B is intended to
a
...
Protect customers against discrimination
c
...
Standardize bank capital requirements internationally
b
...
Sever the link between risk and capital requirements
d
...
5%
b
...
8%
d
...
Credit risk
b
...
Operational risk
d
...
Bank supervision
b
...
Restrictions on asset holdings
d
...
Restrictions on competition
f
...
One problem of the “too-big-to-fail” policy is that it … the incentives for … by big banks
a
...
Increases; moral hazard
c
...
Increases; adverse selection
82
...
The level of the ratio is too high
b
...
The risk weight categories applicable to assets are too simple and not well defined
d
...
In a shareholders' meeting which type of voting applies when shareholders vote for each director separately?
a
...
Cumulative voting

84
...
Leverage ratio
b
...
Net stable funding ratio
d
...
In the US, to be classified as well-capitalized bank, a bank’s leverage ratio must exceed 8 percent
a
...
False
86
...
BCBS
b
...
FDIC
d
...
A stock will pay a dividend of $1 in 1 year from now, then the dividend will grow by 6% annually
...
The expected return is 6%
...
$15
...
$29
...
$33
...
$39
...
Which measure did the PBOC (China’s central bank) recently introduce which is part of the government safety net?
a
...
Lender of last resort
89
...
HKMA
b
...
ICAC
d
...
Which is the primary objective of the HKMA?
a
...
Promote security of banking system
c
...
Act as banker to the government
91
...
FDIC
b
...
FSB
d
...
How often does the FOMC meet?
a
...
Once a month
c
...
Eight times a year
93
...
Organisation structure as partnerships
b
...
High denomination
d
...
A, b and c
f
...
A, c and d
h
...
All of the above
j
...
Which US regulator oversees systemic risk?
a
...


96
...


98
...
The SFC
c
...
The FSB
Which is its equivalent in the EU?
a
...
ESMA
c
...
Bank licensing
b
...
Bank examinations
In the US, Reg Z is intended to
a
...
Protect customers against discrimination
c
...
Standardize bank capital requirements internationally
b
...
Sever the link between risk and capital requirements
d
...
Under Basel I what amount of capital do the banks have to maintain as a proportion of their risk weighted assets?
a
...
3%
c
...
12%
100
...
Credit risk
b
...
Operational risk
d
...
Counterparty risk
101
...
SFC
b
...
HKMA
d
...

Which is the primary objective of the HKMA?
a
...
Protect the peg
c
...

The government organisation responsible for the conduct of monetary policy in the US is the US Treasury
a
...
False
104
...
The five senior members of the seven member Board of Governors
b
...
The seven members of the Board of Governors and five presidents of the regional Fed banks
d
...

Which of the following central banks has the greatest degree of independence?
a
...
European Central Bank
c
...
Federal Reserve System
106
...
HKMA

b
...
PBOC
107
...
True
b
...

The increase in the number of defined contribution pension funds has slowed the growth of mutual funds
a
...
False
109
...
Generate alpha
b
...

Which of the following is a feature of index funds?
a
...
They select and hold stocks to match the performance of a stock index
c
...
All of the above
111
...
-7
...
48%
b
...
48% < Return < 22
...
-9
...
48%
112
...
5% chance of error?
a
...
08%
b
...
05%
c
...
78%
113
...
0049 variance
...
0064 variance
...
00168
...
Vol of A: 6% vol of B: 8%
b
...
Vol of A: 7% vol of B: 8%
d
...
A stock will pay a dividend of $10 at the end of year 1, then the dividend will grow by 2 % annually for ever
...
1 %
...
10/0
...
02 = 322
...
ABC stock price is expected to reach HKD 70 at the end of the year, and to pay a dividend of $1
...
Investors’
expected rate of return is 8
...
What is the dividend yield?(answer in %, to 2 d
...
)
a
...
83%
b
...
Div yield = div 1 / p0
3
...
5 at the end of the year, and to pay a dividend of 56 cents per share
...
5 %
...
P0 = div1 + p1 /1 + re
b
...
66
4
...
2 per share
...
4%
...
p
...
6
...
P1 - P0 / P0
i
...
XYC stock price is expected to reach USD45
...

Investors’ expected rate of return is 6
...
What is the expected stock price today?

6
...
Then after the payment of
the dividend at the end of year 4, the dividend will growth at 1 % annually forever
...

What is the share price at the end of year 3
96
...
A stock will pay a dividend of $5 at the end of year 1, then the dividend will grow by 5% annually
...
The expected return is 7%
...
92
...
GoCo Ltd has a straight voting system
...
Vote for each director separately
1
...
The preferred stock is cumulative
...
Which of the below can Alex expect?
a
...
A fund that invests in young companies that have not reached full maturity is typically called
a
...
If growth or seed
3
...

a
...


Which is/are the investment process of Private Equity? (all)
a
...
Initial Negotiation
c
...
Final Negotiation and Completion

5
...
False
6
...

a
...
False (adverse selection)
7
...
Invests solely in domestic assets
Venture capital firms are usually organized as
b
...
The MPF is a
Defined contributions plan
Defined benefits plan
9
...
1,2,3 ALL
10
...
Insurance Linked Securities

11
...

a
...
Denomination intermediation means investors can participate in equity and debt offerings that, individually, require less
capital than they possess
...
False
13
...
True
14
...
What will happen to investors if the
earthquake takes place but is not meeting the criteria of the bonds?
a
...

15
...
except from perils specifically named in the policy (e
...
homeowners insurance)



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