Chapter 1 Flashcards
Role of Financial Markets and Institutions
Explain a financial market
A market in which financial assets (securities) such as stocks and bonds can be purchased or sold.
Surplus units
Participants who receive more money than they spend. (Investors)
Deficit Units
Participants who spend more money than they receive. (Borrowers)
Securities
a claim on the issuer (stock or bond)
Debt Securities
represent debt ( also called credit, or borrowed funds)
Equity Securities
Represent equity or ownership in the issuer (stocks)
Money vs Capital Markets
Money market is typically a market that matures is 1 year or less while a capital market is longer than one year to mature.
Primary vs Secondary Markets
a Primary market facilitates the issuance of new securities, while a secondary market facilitates the trading of existing markets.
Liquidity
the degree to which securities can be sold without loss of value
Money Market securities
one year or less maturity securities ( t-bills, commercial paper, CD’s)
capital markets securities
commonly issued to finance the purchase of capital assets such as buildings, equipment, or machinery.
Mortgage backed securities
debt obligations representing claims on a package of mortgages. There are many forms, simplest is the investors who purchase these securities receive monthly payments that are made by the home owners on the mortgages baking the security.
Stocks
represent partial ownership in the corporation that issued them.
Derivative Securities
financial contracts whose values are derived from the values of underlying assets ( such as debt securities or equity securities)
Speculation
allows investors to use derivatives to guess on movements in the value of the underlying assets without actually purchasing.
Valuation
The process a firm takes to assess their financial outlook
Behavioral Finance
the application of psychology to make financial decisions. it explains why markets are not always efficient.
market regulation
Securities Exchange Commission (SEC), Sarbanes-Oxley act. requires firms to give more complete information.
privatization
sale of government owned firms to individuals
foreign exchange market
facilitates the exchange of currencies
Perfect market
all information would be continuously free and available to investors, and all investors planning to sell would be available.
Imperfect market
securities buyers and sellers do not have access to full information.
federal funds market
facilitates the flow of funds between banks
depository and non-depository institutions
comercial banks, savings banks, credit unions, all offer depository accounts to build liquidity and individual surplus. Non-depository companies like finance companies, mutual funds, and securities firms, offer things like stocks and money markets where funds are traded and bought and sold.
brokers
bid, ask, underwrite and deal with securities for their clients, acting as a middle man for a commission.
