Chapter 3 - Financial Instruments, Markets, and Institutions

Question 0

Bear Market

Answer 0

A financial market in which prices are falling.

Question 1

Adjustable Rate Mortgage (ARM’s)

Answer 1

A mortgage in which the interest rate and payments change periodically during the life of the loan.

Question 2

Bond

Answer 2

A liability issued by a government, or a business promising to pay the holder a fixed cash amount at a specific maturity date and (usually) to make regular interest payments in the interim.

Question 3

Bull Market

Answer 3

A financial market in which prices are rising.

Question 4

Call Options

Answer 4

An option contract in which the option buyer has the right (but not the obligation) to buy a specified quantity of the underlying asset at a specific price until the expiration date of the option.

Question 5

Capital Market

Answer 5

The market for stocks and long-term debt instruments.

Question 6

Collateral

Answer 6

Assets such as equipment, account receivable, inventory or real estate pledged to a lender to secure a loan.

Question 7

Commercial Bank

Answer 7

A financial institution that offers a wide variety of services, including checking accounts and business loans.

Question 8

Commercial Paper

Answer 8

Short-term debt instruments issued by finance companies and large business firms.

Question 9

Common Stock

Answer 9

Ownership interest in a company; such ownership provides a residual claim to the company’s earnings, paid in the form of dividends.

Question 10

Consols

Answer 10

Perpetual bonds, which have no maturity date but pay a fixed cash flow (interest) forever.

Question 11

Convertible Preferred Stock

Answer 11

Preferred stock that can be converted into common stock at a predetermined price.

Question 12

Coupon Securities

Answer 12

Bonds that make periodic interest payments prior to maturity. In some cases the bonds have actual coupons attached, which bondholders remove and send in at regular intervals to collect interest.

Question 13

Credit Unions

Answer 13

Depository institutions specializing in consumer loans that are organized around a common link.

Question 14

Derivative Financial Instrument

Answer 14

A financial instrument such as a swap or an option or futures contract that derives its value from some other, underlying, financial asset.

Question 15

Dividends

Answer 15

Earnings of a corporation that are distributed to stockholders.

Question 16

Federal Home Loan Banks

Answer 16

Government sponsored banks from whom savings and loans associations can borrow money.

Question 17

Federal National Mortgage Association (Fannie Mae)

Answer 17

A private corporation which certain ties to the government that issues debt instruments that provide claims primarily to pools of government-insured mortgages.

Question 18

FHA-VA Mortgage

Answer 18

A mortgage insured either by the Federal Housing Authority (FHA) or by the Veterans Administration (VA).

Question 19

Financial Intermediaries

Answer 19

Institutions with financial claims on both sides of the balance sheet that act as go-betweens in funneling funds from saver-lenders to borrower-spenders.

Question 20

Financial Markets

Answer 20

Markets in which financial assets can be traded.

Question 21

Fixed-Rate loan (mortgage, security)

Answer 21

A loan (mortgage, security) that carries an unchanging interest rate throughout the life of the instrument.

Question 22

Futures Contract

Answer 22

A standardized agreement, traded on an organized futures exchange, for delivery of a specific commodity or security on a specified future dat and at a specified price.

Question 23

Index Fund

Answer 23

A mutual fund whose goal is to mimic the performance of one of the financial markets indices, often the S&P500

Question 24

Interest

Answer 24

A charge paid by a borrower to a lender for the use of the lender’s money.

Question 25

Intermediated Markets

Answer 25

Markets in which funds flow from saver-lenders to borrower-spenders through financial intermediaries.

Question 26

Life Insurance Company

Answer 26

Companies that sell life insurance, annuities and other savings-oriented products.

Question 27

Long

Answer 27

The buyer of a financial asset, usually an options or futures contract, who is also said to “take a long position.”

Question 28

Money Market

Answer 28

The financial market for short-term securities.

Question 29

Mortgage

Answer 29

A (usually long-term) loan for the purchase of a home or other building, where the home or building serves as collateral in case of default.