Chapter 2 Stocks, Bonds, and Financial Institutions

Question 1

direct ownership of an asset

Answer 1

equity

Question 2

an IOU or loan

Answer 2

debt

Question 3

another form of ownership that differs from a partnership primarily in that the owners of the corporation are not liable for its debts

Answer 3

corporation

Question 4

stockholders are _____. They get whatever is left over after the firm has paid off its suppliers and employees and after it has met its interest payments (debt).

Answer 4

residual claimants

Question 5

a form of debt that is a promise by the borrower to pay a certain sum by a certain date and to pay a set rate of interest until then

Answer 5

bond

Question 6

the date by which the borrower has promised to pay a certain sum for debt

Answer 6

maturity date

Question 7

the set rate of interest on a bond

Answer 7

coupon rate

*this coupon rate is stated on the bond and does not change unless the company that issues the bond goes bankrupt

Question 8

usually the _____ reserves the right to repay the bond (debt) sooner and thus to escape the obligation to continue making interest payments.

Answer 8

borrower

Question 9

most corporate bonds limit the right of early repayment by a clause called a ____ ____, saying that if the bond is redeemed before a certain date, the holder will be paid a specific amount in excess of the bond’s face value

Answer 9

call protection

Question 10

the value at which the bond was initially issued

Answer 10

face value

Question 11

Does the buyer of a bond have the option of redeeming it before the due date or maturity?

Answer 11

no; however, he or she can sell it before that date

Question 12

a measure of the time over which the purchase of a security ties up the buyer’s funds, taking into account interest received during the life of the security

Answer 12

duration

Question 13

a financial instrument that possesses some of the characteristics of equity and of debt

Answer 13

hybrid securities

Question 14

stock on which the corporation has to pay a minimum dividend before it is allowed to pay a dividend to the holders of its common stock

Answer 14

preferred stock

Question 15

bonds that at the owner’s discretion can, at a future date, be exchanged for stock at a future price

Answer 15

convertible bond

Question 16

institutions that undertake certain tasks for borrowers or lenders, such as providing them with advice or buying or selling securities for them

Answer 16

agents

Question 17

firms such as Merrill Lynch that deal with households

Answer 17

retailers

Question 18

firms, like banks, that operate as the middlemen of the financial system
they issue claims on themselves and use the funds they obtain in exchange for these claims to make loans to others

Answer 18

financial intermediaries

Question 19

What are the three benefits to financial intermediaries?

Answer 19

1) lower transaction costs 2) create liquidity by making it possible for lenders to lend short term and borrowers to borrow long term 3) they reduce risk by pooling a large number of loans

Question 20

one of the two types of financial intermediaries that issue claims on themselves that are fixed in dollar terms

Answer 20

depository institution

Question 21

What are the four depository institutions?

Answer 21

commercial banks; S&Ls; mutual savings banks; credit unions

Question 22

one of the two types of of financial intermediaries that is used for a variety of institutions that have the common thread of providing financial services other than taking deposits

Answer 22

non-depository institutions

Question 23

those who undertake purchases and sales of securities for their customers in exchange for a commission; in addition most also provide their customers with investment advice

Answer 23

stockbrokers

Question 24

banks that don’t take deposits; merchant banks; they operate as advisers and agents for companies that want to issue more stock or other securities

Answer 24

investment bank

Question 25

a group of investment banks

Answer 25

syndicate

Question 26

the purchase by investment banks of securities issued by a corporation to be resold to the public with the intent to sell it for a profit or by getting a commission for selling the stock on behalf of the company

Answer 26

underwriting

Question 27

dealers similar to brokers but serve as more than just agents for buyers and sellers; they hold an inventory of securities

Answer 27

security dealers

Question 28

How do investment bankers and security dealers differ?

Answer 28

investment bankers operate in the primary market (new security issues) whereas security dealers operate in the secondary market (seasoned security issues)

Question 29

funds administered by life insurance companies, banks, or specialized fund managers; many corporations provide these to employees; they hold primarily bonds and corporate stock

Answer 29

private pension funds

Question 30

firms that invest the funds they receive from their customers in securities issued by a large number of companies

Answer 30

mutual fund

Question 31

funds that operate just like mutual funds except they buy safe and highly liquid short-term securities such as Treasury bills or bank CDs instead of stocks or bonds

Answer 31

money-market mutual funds

Question 32

financial retailers who obtain their funds on the wholesale market by selling both long-term and short-term securities and issuing stock, as well as by borrowing from banks

Answer 32

finance companies