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MGMT-2000 > Chapter 2 Week 1 > Flashcards

Chapter 2 Week 1 Flashcards

1
Q
A
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2
Q

What is the difference between direct and indirec finance?

A
  1. Direct Finance - $$$ moved through financial markets
  2. Indirect Finance - $$$ moved through financial intermediaires
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3
Q

What are securities?

A

aka financial instruments, claims on a borrowers future income or assets.

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4
Q

What are liabilities?

A

The promissed income or assets to a lender from the borrower.

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5
Q

What is capital?

A

The wealth either financial or physical used to produce more wealth.

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6
Q

What are the 2 ways of raising funds in a financial market?

A
  1. Debt
  2. Equity
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7
Q

What is maturitiy?

A

The term until an insturments expiration date.

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8
Q

What is the difference between short-term and long-term debt?

A
  1. short-term - maturity less than a year
  2. long-term - maturity more than 10 yrs
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9
Q

What is an intermediate-term debt?

A

Debt with maturity between 1 and 10 yrs.

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10
Q

What are equities?

A

Claims to share in the net income and the assets of a business.

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11
Q

What is a residual claimant?

A

The subordinate claims equity holders to debt holders.

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12
Q

What is a primary market?

A

Financial market were new issues of securities are sold to initila buyers by corporations or government agencies.

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13
Q

What is a secondary market?

A

A financial market were securities that have been previoulsy issued can be resold.

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14
Q

What is an investment bank?

A

A primary bank which underwrites securities.

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15
Q

What is underwriting?

A

The guarantee of a price for a corporations securities which are then sold to the public.

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16
Q

Who are brokers?

A

Agents or investors who match buyers with sellers of securities.

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17
Q

Who are dealers?

A

Link buyers and sellers by buying and selling securities at stated prices.

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18
Q

What is liquidity?

A

The speed at which capital or assets can be transferred.

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19
Q

What are the 2 important functions of secondary markets?

A
  1. Liquditiy - makes it easier and quicker to sell financial instruments to raise cash
  2. Price Maker - determines the price of the security that an issuing firm sells
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20
Q

What are the 2 ways secondary markets organied?

A
  1. Exchanges
  2. OTC
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21
Q

What is the difference between exchanges and otcs?

A

Exchanges are places where buyers and sellers of securities conduct trades in a single location

Over the counter markets operate with dealers in different locations who inventory securities to buy and sell securities to anyone who comes to them (over the counter sale).

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22
Q

What is a money market?

A

A financial market where only short-term debt instruments are traded.

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23
Q

What is a capital market?

A

A financial market where longer-term debt and equity instruments are traded.

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24
Q

What are foreign bonds?

A

Debt instruments issued and denominated in a foreigh country in a foreign currency.

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25
Q

What is Eurobond?

A

A bond denominated in a currency other than that of the country in which it is sold (i.e. US Dollars in other countries).

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26
Q

What are Eurocurrencies?

A

Foreign currencies deposited outside the home country.

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27
Q

What are Eurodollars?

A

US dolalrs depoisted in foreign banks outside of the US or in foreign branches of US Banks.

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28
Q

When is EU Euro a Eurobond?

A

When the Euro issued bond is traded in a country which has not adpoted the Euro.

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29
Q

What is financial intermediation?

A

The process of indirect finance which uses financial intermediaries. It is the primary method for moving funds from lenders to borrowers.

30
Q

What are transaction costs?

A

The time and money used in executing financial transactions.

31
Q

What are economies of scale?

A

The reduction in transaction costs per dollar of transactions as the size of transactions increases.

32
Q

What are liqudity services?

A

Services that make it easier for customers to conduct transactions.

33
Q

What is risk?

A

The uncertainity about the returns of investors will earn on assets.

34
Q

What is risk sharing?

A

aka asset transformation the sale of lower risk securities then utilizing the capital from those transactions to purchase higher risk securities.

35
Q

What is diversification?

A

The investing of a collection of assets whose returns aren’t correlated.

36
Q

What is a portfolio?

A

A collection of assets.

37
Q

What is asymmetric information?

A

The disparity of information within a financial market between parties.

38
Q

What is adverse selection?

A

Created by asymmetric information before a transaction occurs, in financial markets it occurs when borrowers who are most likely to need capital are undesirable and are ost likely to seek it. Thus within a market there’s a chance they will get a deal.

39
Q

What is moral hazard?

A

Problem created by asymmetric information after the transaction occurs. In financial markets its the risk a borrower will engage in undesirable activities which make the repayment of capital less likely.

40
Q

What are 2 impediments to a well-functioning financial market?

A
  1. Adverse Selection
  2. Moral Hazard
41
Q

What are economies of scopre?

A

The lowering cost of information production by applying one information resource to many different services.

42
Q

What are conflicts of interest?

A

A type of moral hazard problem that arises when a person or institution has multiple objectives thus, conflicts between objectives.

43
Q

What are the 3 categories of investment intermediaries?

A
  1. Depository institutions
  2. Contractual savings institutions
  3. Investment intermediaries
44
Q

How do depository institutions source funds?

A

deposits

45
Q

How do contractual savings institutions source funds?

A
  1. Premiums from policies
  2. Employer and employee contributions
46
Q

How do investment intermediaries source funds?

A
  1. Commercial paper
  2. Stock
  3. Shares
  4. Bonds
47
Q

What are thrift institutions?

A

savings and loan associations, mutual savings bank, and credit unions

48
Q

What is a commerical bank?

A

Financial intermediaries that raise funds by issuing checkable deposits, and savings deposits, and time deposits then issue forms of debt.

49
Q

What are S&Ls and mutual savings banks?

A

Financial intermediariesthat raise funds primarily through savings deposits and time and checkable depsoits, in the past were restricted to issuing residential mortgages, today the lines have been blurred between them and banks.

50
Q

What is a credit union?

A

A small cooperative lending institution organized around a particular group who acquire funds through deposits and primarly make consumer loans.

51
Q

What are the types of depository institutions?

A
  1. Commercial Banks
  2. S&L, Mutual Savings Banks
  3. Credit Unions
52
Q

What are the types of contractual savings institutions?

A
  1. Life Insurance Companies
  2. Fire & Casualty Companies
  3. Pension Funds and Government Funds
53
Q

What is a life insurance company?

A

Companies that insure poeple against financial hazards following a death, and sell annuities.

54
Q

What is annuity?

A

A contracual obligation to pay or recieve annual income payments upon an event.

55
Q

What is a fire and casualty company?

A

Companies that insure against loss from theft, fire, and accidents. Similar to Life Insurance Companies in function.

56
Q

What are pension funds and government retirment funds?

A

They provide retirment income in the form of annuities to employees who are covered by the plan, funds are acquired by contribution payments made by employees and employees.

57
Q

What are the types of investment intermediaries?

A
  1. Finance Companies
  2. Mutual Funds
  3. Money Market Mutual Funds
  4. Investment Banks
58
Q

What are finance companies?

A

Companies that raise funds by selling commercial paper and by issuing sotcks and bonds. Then lend to consumers and to small business.

59
Q

What are mutual funds?

A

Companies that sell shares to raise capital and use the proceeds to purchase a diversified portfolio of stocks and bonds.

60
Q

What are money market mutual funds?

A

Companies that raise capital by selling shares to buy money market instruments so they are safe and liquid.

61
Q

What are investment banks?

A

Companies that help corporations issue securities. They advise companies as to the type of security to issue, and then helps to sell the securities.

62
Q

What are the 2 reasons governments regulate financial markets?

A
  1. to increase the information available to investors
  2. to ensure the soundness of the financial system
63
Q

How do regulatory agencies increase information available to investors?

A

By requiring corporations issuing securities to disclose certain information about their operations.

64
Q

What are the 6 ways government agencies ensure the soundness of financial intermediaries?

A
  1. Restrictions on Entry
  2. Disclosure
  3. Restrictions on Assets & Activities
  4. Deposit Insurance
  5. Limits on Competition
  6. Restrictions on Interest Rates
65
Q

What are restrictions on entry?

A

Government limitations as to who is allowed to set up a financial intermediary.

66
Q

What is disclosure?

A

The required release of specific pieces of information.

67
Q

What are restrictions on assets and activities?

A

The restriction of activities of financial intermediaries, and requirements of how much they hold in assets.

68
Q

What is deposit insurance?

A

In the US the FDIC which insures each depositor at a bank up to 250k.

69
Q

What are limits on competition?

A
70
Q

What are restrictions on interest rates?

A

MGMT-2000 (3 decks)

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