Chapter 2 Flashcards
is a general term that includes a number of different types of markets for the creation and exchange of financial assets, such as stocks and bonds.
Financial Market
are firms such as commercial banks, credit unions, insurance companies, pension funds, and finance companies that provide financial services to the economy.
Financial Institutions
assets that are claims on the cash flows from other assets; business loans, stocks, and bonds are financial assets
Financial Assets
nonfinancial assets such as plant and equipment; productive assets are real assets; many financial assets are claims on cash flows from real assets
Real Assets
firms that underwrite new security issues
Investment Banks
large commercial banks that provide both traditional and investment banking services throughout the world
Money Center Banks
is the process of preparing a security issue for sale.
Origination
is the process by which the investment banker helps the company sell its new security issue.
Underwriting
the investment banker buys the new securities from the issuing company and resells them to investors.
Firm Commitment underwriting
The investment banker’s compensation is called the
Underwriting spread
Is the process of marketing and reselling the securities to investors.
Distribution
a financial market in which new security issues are sold by companies directly to investors
Primary Market
is any market where owners of outstanding securities can sell them to other investors.
Secondary Market
is the ease with which a security can be sold and converted into cash.
Marketability
is the ability to convert an asset into cash quickly without loss of value.
Liquidity
are market specialists who bring buyers and sellers together when a sale takes place.
Brokers
make markets for securities and do bear risk. They make a market for a security by buying and selling from an inventory of securities they own.
Dealers
are global markets where short-term debt instruments, which have maturities of less than one year, are traded.
Money Markets
the sale of an unregistered security directly to an investor, such as an insurance company or a wealthy individual
Private Placement
What is the role of the financial system, and what are the two major components of the financial system?
The role of the financial system is to gather money from businesses and individuals who have surplus funds and channel funds to those who need them. The financial system consists of financial markets and financial institutions.
What is the difference between saver-lenders and borrower-spenders, and who are the major representatives of each group?
Saver-lenders are those who have more money than they need right now. The principal saver-lenders in the economy are households. Borrower-spenders are those who need the money saver-lenders are offering. The main borrower-spenders in the economy are businesses and the federal government.
Suppose you own a security that you know can be easily sold in the secondary market, but the security will sell at a lower price than you paid for it. What would this mean for the security’s marketability and liquidity?
Your security seems to be marketable, but not liquid. Liquidity implies that when a security is sold, its value will be preserved; marketability does not.
Trader Inc. is a $300 million company, as measured by asset value, and Horst Corp. is a $35 million company. Both are privately held corporations. Explain which firm is more likely to go public and register with the SEC, and why.
Trader, Inc., is more likely to go public because of its larger size. Though the cost of SEC registration and compliance is very high, larger firms can offset these costs by the lower funding cost in public markets. Smaller companies find the cost prohibitive for the dollar amount of securities they sell.
Jim Hendry bought 300 shares of IBM through his brokerage account.
Secondary
Peggy Jones bought $5,000 of IBM bonds from the firm.
Primary
Hathaway Insurance Company bought 500,000 shares of Trigen Corp. when the company issued stock.
Primary
Cranjet Inc. is issuing 10,000 bonds, and its investment banker has guaranteed a price of $985 per bond. The investment banker sells the entire issue to investors for $10,150,000.
Underwriting? 300,000
What is the percentage underwriting cost?
3.05%
How much did Cranjet raise?
$9,850,000
