Ch. 1 Role of Financial Markets and Institutions Flashcards
Surplus units
who make more money than they spend
EX: investors
Deficit units
people who spend more money than they make
EX: borrowers of student loans or mortgages
Securities
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
Primary markets
issuance of new securities
Secondary markets
trading of existing securities, which allows for a change in ownership
If a security is illiquid = _____ in the secondary market and may have to sell the security at _____?
there will be less willing buyer; a large discount just to attract a buyer
Money Market Securities
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
Capital Market Securities
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
Derivative Securities
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.
what happens to bonds if the interest rates go up or down?
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
what leads to uncertainty in the valuation of securities?
Limited information
-Asymmetric information: 1 party possess more information than the other
Securities Act of 1933
- ensure complete disclosure of relevant financial info
- prevent fraudulent practices
- primary market
Securities Exchange Act of 1934
extended Securities Act of 1933 to secondary market issues
Sarbanes-Oxley Act of 2002
required firms to provide complete and accurate financial information.
International Integration of Financial Markets
allows governments/corporations easier access to funding from creditors or investors in other countries to support their growth.
what’s the Role of depository institutions?
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
Commercial Banks
-main type of depository institution
-Federal Funds Market - facilitates the flow of funds between depository institutions
Savings Institutions
Concentrate on residential mortgage loans
Credit Unions
-Nonprofit organizations
-Restrict business to members with a common bond
what are the 3 types of depository institutions?
- commercial banks
- savings institutions
- credit unions
who are the major investors in stocks?
insurance companies, mutual/pension funds
-can influence the management of publicly traded firms.
-make decisions based on shareholders’ best interests
systemic risk
problems among financial institutions/markets that could cause a collapse in the financial system.
how does mortgage defaults affect financial institutions in the credit crisis of 2008 and 2009?
- financial institutions sold their mortgages to other financial institutions
- They invested in mortgage-backed securities and received lower payments as mortgage defaults occurred.
- They relied heavily on short-term debt to finance their operations and used their holdings of mortgage-backed securities as collateral.
- mortgage defaults increased = excess of unoccupied housing.
what are the 5 Non-depository Institutions?
- Finance and insurance companies
- Mutual and pension funds
- Securities firms