Chapter 3 POWERPOINT Flashcards
Financial Asset Markets
deals with stocks, bonds, mortgages, and other claims on real assets with respect to the distribution of the future cash flows generated by such assets
Physical Asset Markets
deals with PRODUCTS such as wheat, autos, etc.
What is a financial market?
a system that includes individuals and institutions, instruments and procedures that bring together borrowers and savers, no matter the location
PRIMARY ROLE:
to facilitate the flow of funds from individuals and businesses that save surplus funds to individuals and businesses that have need of funds.
Markets are a means for:
- trading currency
- assets
- securities
- financial instruments
What would we do without financial markets?
without financial markets, consumption would be restricted to income earned each year plus any amounts put aside (perhaps in a coffee can) in previous years.
Informational Efficiency
financial markets if prices reflect existing information and adjust very quickly when new information becomes available.
Weak-form efficiency
all information contained in past price movements is fully reflected in current market prices.
Abnormal return
defined as a return that is greater than is justified by the risk associated with the investment.
EXAMPLE:
if you and your friends invest in similar-risk securities, you should all earn about the same return
However, if you earn a 20% return and your friends earn a 12% return on investments with the same risk, the additional 8% is considered an abnormal return
Types of Financial Markets
- money markets
- capital markets
- debt markets
- equity markets
- primary markets
- secondary markets
- derivative markets
Money Markets
- short-term financial instruments
- debt instruments only
PRIMARY FUNCTION:
to provide liquidity to businesses, governments, and individuals so they can meet short-term cash requirements
Capital Markets
- long-term financial instruments
- debt instruments (mortgages, corporate bonds, government bonds)
Debt Markets
Loans are traded
Debt instrument is a contract that specifies how and when a borrower must repay a lender
Equity Markets
Stocks are traded
Equity represents “ownership” in a corporation that entitles the stockholder to share in future cash distributions generated by the firm
Types of borrowers and lenders
PRIMARY MARKETS
-where corporations raise new funds
(corporations receive proceeds from the stock sale)
SECONDARY MARKETS
-where previously issues securities are traded
(no corporations… only investor to investor)
