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Financial Institution > Ch. 1 Role of Financial Markets and Institutions > Flashcards

Ch. 1 Role of Financial Markets and Institutions Flashcards

1
Q

Surplus units

A

who make more money than they spend
EX: investors

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2
Q

Deficit units

A

people who spend more money than they make
EX: borrowers of student loans or mortgages

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3
Q

Securities

A

claim on the issuers

-Debt securities - debt (AKA credit, or borrowed funds) incurred by the issuer.
-Equity securities - (AKA stocks) represent equity or ownership in the firm

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4
Q

Primary markets

A

issuance of new securities

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5
Q

Secondary markets

A

trading of existing securities, which allows for a change in ownership

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6
Q

If a security is illiquid = _____ in the secondary market and may have to sell the security at _____?

A

there will be less willing buyer; a large discount just to attract a buyer

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7
Q

Money Market Securities

A

facilitate the sale of short-term debt securities by deficit to surplus units.
-Debt securities that have a maturity of one year or less.
-Low returns = low risk
-T-bills, commercial paper

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8
Q

Capital Market Securities

A

facilitate the sale of long-term securities by deficit to surplus units.

-Bonds: long-term debt securities issued by the Treasury, government agencies, and corporations to finance their operations.

-Mortgage-backed securities: a bundle of home loans bought from the banks that issued them
Financial crisis 2007-2009

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9
Q

Derivative Securities

A

a financial instrument whose value depends upon the value of another asset

-Risk management - use derivative securities to adjust the risk of their existing investments in securities.

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10
Q

what happens to bonds if the interest rates go up or down?

A

If Interest rates go up, the value of bonds will go down VS If Interest rates go down, the value of bonds will go up

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11
Q

what leads to uncertainty in the valuation of securities?

A

Limited information
-Asymmetric information: 1 party possess more information than the other

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12
Q

Securities Act of 1933

A
  1. ensure complete disclosure of relevant financial info
  2. prevent fraudulent practices
  3. primary market
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13
Q

Securities Exchange Act of 1934

A

extended Securities Act of 1933 to secondary market issues

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14
Q

Sarbanes-Oxley Act of 2002

A

required firms to provide complete and accurate financial information.

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15
Q

International Integration of Financial Markets

A

allows governments/corporations easier access to funding from creditors or investors in other countries to support their growth.

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16
Q

what’s the Role of depository institutions?

A

accept deposits from surplus units and provide credit to deficit units through loans and purchases of securities.
-bank
-evaluating creditworthiness
-Diversify their loans among deficit units

17
Q

Commercial Banks

A

-main type of depository institution
-Federal Funds Market - facilitates the flow of funds between depository institutions

18
Q

Savings Institutions

A

Concentrate on residential mortgage loans

19
Q

Credit Unions

A

-Nonprofit organizations
-Restrict business to members with a common bond

20
Q

what are the 3 types of depository institutions?

A
  1. commercial banks
  2. savings institutions
  3. credit unions
21
Q

who are the major investors in stocks?

A

insurance companies, mutual/pension funds
-can influence the management of publicly traded firms.
-make decisions based on shareholders’ best interests

22
Q

systemic risk

A

problems among financial institutions/markets that could cause a collapse in the financial system.

23
Q

how does mortgage defaults affect financial institutions in the credit crisis of 2008 and 2009?

A
  1. financial institutions sold their mortgages to other financial institutions
  2. They invested in mortgage-backed securities and received lower payments as mortgage defaults occurred.
  3. They relied heavily on short-term debt to finance their operations and used their holdings of mortgage-backed securities as collateral.
  4. mortgage defaults increased = excess of unoccupied housing.
24
Q

what are the 5 Non-depository Institutions?

A
  1. Finance and insurance companies
  2. Mutual and pension funds
  3. Securities firms
25
Q

Finance companies

A

obtain funds by issuing securities and lend it to individuals/small businesses

26
Q

Mutual funds

A

sell shares to surplus units and use the funds received to purchase a portfolio of securities.

27
Q

Securities firms

A

Broker, Underwriter, Dealer, Advisory

28
Q

Insurance companies

A

provide policies that reduce the financial burden
-Charge premiums and invest in financial markets.

29
Q

Pension funds

A

manage funds until they are withdrawn for retirement

Financial Institution (4 decks)

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