Chapter 2 The Financial Market Environment

Question 1

financial institution

Answer 1

An intermediary that channels the savings of individuals, businesses, and governments into loans or investments.

Question 2

commercial banks

Answer 2

Institutions that provide savers with a secure place to invest their funds and that offer loans to individual and business borrowers.

Question 3

investment banks

Answer 3

Institutions that assist companies in raising capital, advise firms on major transactions such as mergers or financial restructurings, and engage in trading and market making activities.

Question 4

Glass-Steagall Act

Answer 4

An act of Congress in 1933 that created the federal deposit insurance program and separated the activities of commercial and investment banks.

Question 5

shadow banking system

Answer 5

A group of institutions that engage in lending activities, much like traditional banks, but do not accept deposits and therefore are not subject to the same regulations as traditional banks.

Question 6

financial markets

Answer 6

Forums in which suppliers of funds and demanders of funds can transact business directly.

Question 7

private placement

Answer 7

The sale of a new security directly to an investor or group of investors.

Question 8

public offering

Answer 8

The sale of either bonds or stocks tot he general public.

Question 9

primary market

Answer 9

Financial market in which securities are initially issued; in which the issuer is directly involved in the transaction.

Question 10

secondary market

Answer 10

Financial market in which preowned securities (those that are not new issues) are traded.

Question 11

money market

Answer 11

A financial relationship created between suppliers and demanders of short-term funds.

Question 12

marketable securities

Answer 12

Short-term debt instruments, such as U.S. Treasury bills, commercial paper, and negotiable certificates of deposit issued by government, business, and financial institutions, respectively.

Question 13

Eurocurrency market

Answer 13

International equivalent of the domestic money market.

Question 14

capital market

Answer 14

A market that enables suppliers and demanders of long-term funds to make transactions.

Question 15

bond

Answer 15

Long-term debt instrument used by business and government to raise large sums of money, generally from a diverse group of lenders.

Question 16

preferred stock

Answer 16

A special form of ownership having a fixed periodic dividend that must be paid prior to payment of and dividends to common stockholders

Question 17

broker market

Answer 17

The securities exchanges on which the two sides of a transaction, the buyer and the seller, are brought together to trade securities.

Question 18

securities exchanges

Answer 18

Organizations that provide the marketplace in which firms can raise funds through the sale of new securities and purchasers can resell securities.

Question 19

dealer market

Answer 19

The market in which the buyer and seller are not brought together directly but instead have their orders executed by securities dealers that “make markets” in the given security.

Question 20

market makers

Answer 20

Securities dealers who “make markets” by offering to buy or sell certain securities at stated prices.

Question 21

Nasdaq market

Answer 21

An all-electronic trading platform used to execute securities trades.

Question 22

over-the-counter (OTC) market

Answer 22

Market where smaller, unlisted securities are traded.

Question 23

bid price

Answer 23

The highest price offered to purchase a security.

Question 24

ask price

Answer 24

The lowest price at which a security is offered for sale.

Question 25

Eurobond market

Answer 25

The market in which corporations and governments typically issue bonds denominated in dollars and sell them to investors located outside the United States.

Question 26

foreign bond

Answer 26

A bond that is issued by a foreign corporation or government and is denominated in the investor’s home currency and sold in the investor’s home market.

Question 27

international equity market

Answer 27

A market that allows corporations to sell blocks of shares to investors in a number of different countries simultaneously.

Question 28

efficient market

Answer 28

A market that establishes correct prices for the securities that firms sell and allocates funds to their most productive uses.

Question 29

securitization

Answer 29

The process of pooling mortgages or other types of loans and then selling claims or securities against that pool in the secondary market.

Question 30

mortgage-backed securities

Answer 30

Securities that represent claims on the cash flows generated by a pool of mortgages.

Question 31

Federal Deposit Insurance Corporation (FDIC)

Answer 31

An agency created by the Glass-Steagall Act that provides insurance for deposits at banks and monitors banks to ensure their safety and soundness.

Question 32

Gramm-Leach-Bliley Act

Answer 32

An act that allows business combinations (that is, mergers) between commercial banks, investment banks, and insurance companies and thus permits these institutions to compete in markets that prior regulations prohibited them from entering.

Question 33

Securities Act of 1933

Answer 33

An act that regulates the sale of securities to the public via the primary market.

Question 34

Securities Exchange Act of 1934

Answer 34

An act that regulates the trading of securities such as stocks and bonds in the secondary market.

Question 35

Securities and Exchange Commission (SEC)

Answer 35

The primary government agency responsible for enforcing federal securities laws.

Question 36

ordinary income

Answer 36

Income earned through the sale of a firm’s good or services.

Question 37

marginal tax rate

Answer 37

The rate at which additional income is taxed

Question 38

average tax rate

Answer 38

A firm’s taxes divided by its taxable income.

Question 39

double taxation

Answer 39

Situation that occurs when after-tax corporate earnings are distributed as cash dividends to stockholders, who then must pay personal taxes on the dividend amount.

Question 40

capital gain

Answer 40

The amount by which the sale price of an asset exceeds the asset’s purchase price.