Chapter 1: Introduction

Question 1

agency problem

Answer 1

firm’s managers, who act as agents for investors, may act in their own interests to the disadvantage of the investors
- cause for market failure

cf. justification for regulation

Question 2

arbitrage

Answer 2

to circumvent regulation

Question 3

asset

Answer 3

any possession that has value in an exchange (broadly speaking)

Question 4

asymmetric information

Answer 4

investors and managers have uneven access to or uneven possession of information

Question 5

call option

Answer 5

when an option’s contract grants the owner of the option the right to buy a financial asset from the other party,

Question 6

capital market

Answer 6

a financial market for longer-maturity financial assets

Question 7

competitive market

Answer 7

market that produce its particular goods or services in an efficient manner and at the lowest possible cost.

Question 8

credit risk (default risk)

Answer 8

the risk that the issuer or borrower will default on the obligation.

Question 9

debt instrument

Answer 9

fixed dollar amount claim that the holder of a financial asset has

Question 10

derivative instrument

Answer 10

contract whose value depends on the value of the underlying financial asset.

Question 11

disclosure regulation

Answer 11

form of regulation that requires issuers of securities to

make public a large amount of financial information to actual and potential investors

Question 12

domestic market

Answer 12

where issuers domiciled in a country issue securities and where those securities are subsequently traded

Question 13

equity instrument (residual claim)

Answer 13

obligates the issuer of the financial

asset to pay the holder an amount based on earnings, if any, after holders of debt instruments have been paid

Question 14

external market (international market,
offshore market, Euromarket)

Answer 14

allows trading of securities with two distinguishing features:
(1) at issuance securities are offered simultaneously to
investors in a number of countries, and
(2) they are issued outside the jurisdiction of any
single country

Question 15

financial activity regulation

Answer 15

consists of rules about traders of securities and trading on financial markets

Question 16

financial asset

Answer 16

intangible assets

Question 17

financial market

Answer 17

q

Question 18

fixed-income instrument

Answer 18

v

Question 19

foreign-exchange risk

Answer 19

c

Question 20

foreign market

Answer 20

c

Question 21

information costs

Answer 21

c

Question 22

internal market (national market)

Answer 22

c

Question 23

market failure

Answer 23

c

Question 24

money market

Answer 24

c

Question 25

price discovery process

Answer 25

c

Question 26

purchasing power risk (inflation risk)

Answer 26

c

Question 27

put option

Answer 27

c

Question 28

regulation of financial institutions

Answer 28

c

Question 29

regulation of foreign participants

Answer 29

c

Question 30

search costs

Answer 30

c

Question 31

secondary market

Answer 31

c

Question 32

spot market (cash market)

Answer 32

c

Question 33

tangible asset

Answer 33

c

Question 34

What is the difference between a financial asset

and a tangible asset?

Answer 34

c

Question 35

What is the difference between the claim of a
debtholder of General Motors and an equityholder
of General Motors?

Answer 35

c

Question 36

What is the basic principle in determining the

price of a financial asset?

Answer 36

c

Question 37

Why is it difficult to determine the cash flow of a

financial asset?

Answer 37

c

Question 38

Why are the characteristics of an issuer important

in determining the price of a financial asset?

Answer 38

c