chapter 3 Flashcards
underlying instruments
(primitive securities), are used by savers/lenders to transfer resources directly to investors/borrowers
Bonds
make payments depending on the solvency of the firm that issued them.
derivatives
specify a payment to be made between the person who sells the instrument and the person who buys it.
As the historical gap between direct and indirect finance has narrowed,
intermediaries are generally involved on some level.
Financial instruments obligate one party to transfer something of value to another party. Good example of this include
a music publisher pays royalties for music that you wrote and they published.
you car insurance company paying to repair you car after an accident.
your monthly car payment.
Which of the following does not correctly describe financial instruments?
They are written in specialized language that varies from contract to contract.
It has to be the same standardized language
The fundamental distinction between direct and indirect finance involves
who owns the asset
Which of the following is true about financial instruments?
They are legally enforceable.
Of the economic entities listed, which tends to be most highly leveraged?
financial institutions
When a standardized financial instrument summarizes essential details about the issuer, the information communicated is designed to
eliminate the expensive and time-consuming process of collecting detailed information.
As firms borrow more, they become _______ highly leveraged and their net worth ________.
more, falls
The two fundamental classes of financial instruments are _____.
derivative instruments and underlying instruments
You purchase a financial instrument that allows - but does not require - you to purchase some asset in the future. You have purchased __________, and this type of financial instrument is used primarily _________.
an options contract; to transfer risk
Which of the following is true about the value of a financial payment, all else equal?
Payments made when needed most are more valuable.
Indicate which of the following financial instruments are used primarily as stores of value.
Stocks
Home mortgages
Asset-backed securities
An asset-backed security is used primarily
to store value
primary markets
Markets where newly issued securities are sold.
secondary markets
Markets where existing securities are traded.
An IPO (initial public offering) refers to the first issue of new stock. This new stock would be bought and sold in the
primary market
An example of a financial instrument that ensures payments are made under specific conditions is ________.
insurance contract
In general, a well-run financial market is characterized by which of the following?
Accurate and available information
Investor protection
Low transaction costs
Why are financial intermediaries crucial to healthy financial markets?
They bring borrowers and lenders together.
They reduce transaction costs.
When dealers and brokers trade securities in the same physical location, as with the New York Stock Exchange, _________ exists.
centralized exchange
major financial institutions
Pension funds
Securities firms
Depository institutions
Insurance companies
Which of the following determines whether debt is traded in money markets versus bond markets?
The time until the debt is fully repaid
How are governments crucial to a well-run financial market?
they enforce the rules of the game
An institution that gives households and corporations access to direct finance is called ________.
brokerage
Securities firms
Investment banks and mutual funds companies
Government-sponsored enterprises
Federal credit agencies that directly provide loans
Depository institutions
banks and credit unions
