chapter 2 flashcards
why is it important of financial markets and intuitions?
- financial markets and institutions are critical to the success of business
- businesses have to go to financial markets and institutions for the financing they need to grow
- when they have surplus cash, they have to invest in bank accounts or in securities
- a modern financial system offers financing in many different forms
what is a Financial Market?
a market in which securities are issued and traded
whats the difference between a Primary Market and Secondary Market?
- Primary Market: the market for the sale of new securities
- Secondary Market: the purchase and sale of existing securities is known as secondary transaction.
what’s another word for stock markets and why?
also called equity markets, since shareholders are said to own common equity of the firm
what is the main stock exchange in Canada?
The Toronto Stock Exchange
how are the trading in the shares of smaller and emerging Canadian companies done?
through the TSX Venture Exchange and the Canadian National Stock Exchange
what are the other financial markets?
- fixed income market
- capital market
- money market
- foreign exchange markets
- commodities markets
- markets for options and other derivatives
- markets for cryptocurrencies
what is a Fixed Income Market?
a market where securities promising fixed amount of income, such as bonds, are traded among investors. also known as Debt Market
what is Capital Market?
a market for long term (more than one year) debt and equity securities
what is a Money Market?
a market where short term (less than one year) securities are traded among investors
what is a Foreign Exchange Market ?
any corporation engaged in international trade must be able to transfer money from the dollars to other currencies or vice versa. Foreign exchange is traded over the counter through a network of the largest international banks
what are Commodities markets?
markets where commodities such as corn, wheat, oil, and natural gas are traded
what are Markets for options and other derivatives?
markets where derivative securities, such as futures and options, are traded among investors
what are markets for cryptocurrencies?
a cryptocurrency is an alternative currency, in the form of a digital asset. assets such as this operate outside of central banking systems and use decentralized control to create and secure financial transactions
whats a Financial Intermediary ?
an organization that raises money from investors and provides financing for individuals, corporations and other organizations
list the different Classes of Intermediaries?
- mutual funds
- exchange-traded funds
- hedge funds
- private equity
- pension funds
what are some examples of financial institutions and how are they different?
- Banks and insurance companies are examples of financial intermediaries, they are intermediaries that do more than just pool and invest savings
what’s the purpose of Financial Institutions?
they raise financing by accepting deposits or selling insurance policies and provide additional financial services
how do Financial Institutions differ from a mutual fund?
unlike a mutual fund, they do not only invest in securities but also loan money directly to individuals and businesses
what are some functions of Financial Markets and Intermediaries?
- transporting cash across time
- risk transfer and diversification
- liquidity
- the payment mechanism
- information (commodity prices, interest rates, stock values)
what do WELL FUNCTIONING markets allow?
allow individuals and corporations to share risks and transport savings across time
what is the Opportunity Cost of Capital?
the minimum acceptable rate of return on capital investments
how is the Cost of Capital for corporate investment set?
by the expected rates of return on investment opportunities in financial markets
explain the Crisis of 2007-2009?
- illustrates the importance of financial markets and institutions
- had its roots in the easy money policies of the US Federal Reserve and other central banks
- subprime mortgages packed into martgae back securities
- US government had to intervene to rescue institutions
- in Europe the banking crisis became entwined with a sovereign debt crisis
- Greece-largest sovereign default in history (100 billion euros)
- US government, US federal reserve, rating agencies, bankers promoting products all to blame
what does Saving Flow through financial markets and intermediaries do?
it provides financing for individuals, corporations or other organizations
mutual funds, exchange traded funds and pension funds allows investors to..?
diversify in professionally managed portfolios
what do Financial Markets provide for investors?
provide liquidity and diversification opportunities for investors, as well as information regarding prices, interest rates and values
what does the existence of financial markets allow?
it allows individuals to maximize value
