Financial Markets and Investment Banking
Market structure
Questions here test structure and mechanics. Know the money market (instruments of one year or less: treasury bills, commercial paper, interbank deposits) versus the capital market (equities and bonds); the primary market, where an issuer raises new funds through an IPO, rights issue, private placement or bond issue, versus the secondary market, where investors trade existing securities and gain liquidity and price discovery. Learn the roles of the regulator, the exchange, the central securities depository, brokers, dealers and underwriters, plus the settlement cycle and listing requirements in outline.
Investment banking process
Origination, underwriting (firm commitment versus best efforts), book building, prospectus disclosure, pricing and allotment, stabilisation, and the persistent puzzle of IPO underpricing, measured as the first-day return. Liquidity is assessed through bid–ask spread, market depth and turnover.
Traps: describing a secondary-market trade as raising capital for the issuer; forgetting that the spread is a cost paid to the market maker (buy at the ask, sell at the bid); confusing a market order (execution certainty, price uncertainty) with a limit order (price certainty, execution uncertainty); treating an underwriting commitment as a guarantee of profit.
Worked example
A dealer quotes 24.80 bid / 25.10 ask. The spread is 0.30, which is 0.30/24.95 = 1.2% of the midpoint. An investor who buys and immediately sells loses roughly 1.2% to the spread before commissions - the round-trip transaction cost, and a rough measure of illiquidity.