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comm 220: market analysis > chapter 8 powerpoint: An Overview of the Financial System > Flashcards

chapter 8 powerpoint: An Overview of the Financial System Flashcards

1
Q

Function of Financial Markets

A

Channel funds from economic players that have surplus funds to those that have a shortage

Efficient allocation of capital

Allows consumers to time their purchases

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2
Q

direct finance

A

Borrow funds directly from lenders

Involves selling a liability (IOU or debt)

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3
Q

Bonds

A

Debt instruments

A contract between a borrower (who issues the bond) and lender (who owns it)

Regularly payments until Maturity

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4
Q

short term bond

A

< 1 year

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5
Q

intermediate term bond

A

1-10 years

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6
Q

long term bond

A

> 10 years

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7
Q

Equity

A

Shares in a corporation

Don’t have maturity dates

Some make dividend payments

Equity holders are residual claimants

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8
Q

who has more seniority, equity holders or debt holders?

A

debt holders

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9
Q

Primary Market

A

New security issues sold to initial buyers

Not well known to public; typically private

investment banks guarantee prices (called underwriting)

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10
Q

underwriting

A

investment banks guarantee prices in the primary market

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11
Q

Secondary Market

A

Previously issued securities can be bought and sold

Brokers match buyers and sellers with each other

Dealers offer to buy and sell securities at stated prices

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12
Q

brokers

A

match buyers and sellers with each other

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13
Q

dealers

A

offer to buy and sell securities at stated prices

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14
Q

Two main ways to organize a secondary market

A

Exchanges

Over-the-Counter Markets (OTC)

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15
Q

secondary market Exchanges

A

Buyers and sellers meet in one central location

Toronto Stock Exchange for stocks

ICE Futures Canada for commodities (wheat, oats)

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16
Q

secondary market Over-the-Counter Markets (OTC)

A

Dealers have inventory, ready to buy/sell at stated prices

Many stocks are not traded OTC, but are on exchanges

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17
Q

Canadian government bond market is an OTC market or Exchanges?

A

OTC market

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18
Q

Money Markets

A

Only short-term debt instruments are traded (<1 year)

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19
Q

why do corporations and banks actively use money markets?

A

to each interest on temporary surplus funds

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20
Q

Capital Markets

A

Market for longer-term debt (>1 year)

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21
Q

are money markets or capital markets more liquid?

A

Money markets are more liquid than capital markets

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22
Q

Money Market Instruments

A

Gov. of Canada Treasury Bills

Certificates of Deposit

Commercial Paper

Repurchase Agreements

Overnight Funds

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23
Q

Gov. of Canada Treasury Bills

A

zero-coupon, risk-free bonds

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24
Q

Certificates of Deposit

A

debt instrument issued to depositors

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25
Q

Commercial Paper

A

short-term debt issued by banks and large corporations

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26
Q

Repurchase Agreements

A

short-term loans with T-bills as collateral

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27
Q

Overnight Funds

A

overnight loans between banks

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28
Q

Money Market Rates

A

Prime Rate

Overnight interest rate

T-bill rate

LIBOR (London Interbank Offer Rate)

29
Q

Prime Rate

A

rate of interest on corporate bank loans

30
Q

Overnight interest rate

A

on short-term loans between banks

31
Q

LIBOR (London Interbank Offer Rate)

A

interbank rate on dollar deposits in the London market (being phased out)

32
Q

Capital Market Instruments

A

Stocks

Mortgages and mortgage-backed securities

Corporate bonds

Government of Canada bonds

Canada Savings bonds

Provincial and municipal government bonds

Government agency securities

Consumer and bank commercial loans

33
Q

Capital Market Instruments: Corporate bonds

A

high rating, long-term

34
Q

Capital Market Instruments: Government of Canada bonds

A

highly liquid

35
Q

Capital Market Instruments: Canada Savings bonds

A

floating-rate

redeemable

registered bonds

36
Q

Foreign Bonds

A

Sold in foreign country

denominated in that country’s currency

For example, Canadian company selling bond in the United Kingdom denominated in British Pounds (“bulldog bonds”)

37
Q

Eurobond (a.k.a. International bond)

A

Sold in foreign country, denominated in another currency

Relatively recent development

For example, Canadian (or, say, Mexican) company selling bond in the United Kingdom denominated in CAD

38
Q

how widely used are Eurobonds?

A

over 80% of new issues are Eurobonds

39
Q

Eurocurrencies

A

Variant of Eurobond

Foreign currencies deposited in banks outside home country

includes Eurodollars

40
Q

Eurodollars

A

U.S. dollars deposited in foreign banks outside the U.S. or in foreign branches of U.S. banks

Eurocurrency

41
Q

Financial Intermediation

A

Indirect financing using financial intermediates (banks)

Primary route to move funds from lenders to borrowers

42
Q

Four main roles of financial intermediates

A

Lowers Transaction Costs

Improves Risk Sharing

Help solve Asymmetric Information problems

uses Economies of Scope

43
Q

how do financial intermediaries lower transaction costs?

A

Economies of scale

Liquidity services (e.g. checking accounts)

44
Q

how do financial intermediaries improve risk sharing?

A

Asset transformation

Diversification

45
Q

how do financial intermediaries help solve asymmetric information problems?

A

Financial intermediates can screen and monitor

reduce Adverse Selection and Moral Hazard

46
Q

Adverse Selection

A

Potential borrowers who are more likely to default will most actively seek out loans

in this case, the buyer has more information than the seller

problem that happens before the transaction occurs

results from Asymmetric Information

47
Q

who usually has more information when It comes to adverse selection?

A

Buyers

48
Q

Symmetric information

A

when both parties have equal knowledge

49
Q

Moral Hazard

A

Borrowers might engage in activities that are undesirable from a lender’s point of view

happens after the transaction happened

the risk that a party has not entered into a contract in good faith or has provided misleading information about its assets, liabilities, or credit capacity

a problem cause by asymmetric information

50
Q

Asymmetric Information problems

A

Adverse Selection

Moral Hazard

51
Q

Economies of Scope

A

spillover benefits from providing several services

52
Q

negative effect of institutions using economies of scope

A

May create conflicts of interest

53
Q

Types of Financial Intermediaries

A

Depository Institutions

Contractual Savings Institutions

Investment Intermediaries

54
Q

Depository Institutions

A

Chartered Banks

Trusts and Mortgage Loan Companies

Credit Unions

Caisses Populaires

55
Q

Contractual Savings Institutions

A

Life Insurance Companies

Property and Casual Insurance Companies

Pension Funds

Retirement Funds

56
Q

Investment Intermediaries

A

Finance Companies

Mutual Funds

Money Market Mutual Funds

Hedge Funds

Investment Banks

57
Q

chartered banks’ primary liabilities (source of funds) and primary assets (use of funds)

A

source of funds: Deposits

use of funds: Loans, mortgages, government bonds

58
Q

trust and loan companies’ primary liabilities (source of funds) and primary assets (use of funds)

A

source of funds: Deposits

use of funds: Mortgages

59
Q

credit unions and causes populaires’ primary liabilities (source of funds) and primary assets (use of funds)

A

source of funds: Deposits

use of funds: Mortgages

60
Q

Life insurance companies’ primary liabilities (source of funds) and primary assets (use of funds)

A

source of funds: Premiums from policies

use of funds: Corporate bonds and mortgages

61
Q

Property and casualty insurance companies’ primary liabilities (source of funds) and primary assets (use of funds)

A

source of funds: Premiums from policies

use of funds: Corporate bonds and stocks

62
Q

Pension funds’ primary liabilities (source of funds) and primary assets (use of funds)

A

source of funds: Retirement contributions

use of funds: Corporate bonds and stocks

63
Q

Finance companies’ primary liabilities (source of funds) and primary assets (use of funds)

A

source of funds: Finance paper, stocks, bonds

use of funds: Consumer and business loans

64
Q

Mutual funds’ primary liabilities (source of funds) and primary assets (use of funds)

A

source of funds: Shares

use of funds: Stocks and bonds

65
Q

’ primary liabilities (source of funds) and primary assets (use of funds)

A

source of funds: Shares

use of funds: Money market instruments

66
Q

Primary Reasons for Regulation of Financial Markets

A

Increase information available to investors

Ensure soundness of financial intermediaries

67
Q

what does increasing information available to investors do?

A

Reduce adverse selection and moral hazard problems

Increase efficiency of financial markets

68
Q

what does ensuring soundness of financial intermediaries do?

A

Restrictions on entry and competition

reporting requirements

restrictions on assets and activities

Deposit insurance

comm 220: market analysis (37 decks)

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