Chapter Two

Question 1

Financial institutions

Answer 1

serve as intermediaries by channeling the savings of individuals, businesses, and governments into loans or investments

Question 2

the key suppliers of funds

Answer 2

individuals, businesses, and governments

Question 3

net suppliers

Answer 3

individuals; They save more money than they borrow

Question 4

net demanders

Answer 4

government and business firms; They borrow more money than they save.

Question 5

commercial banks

Answer 5

Institutions that provide savers with a secure place to invest their funds and that offer loans to individual and business borrowers.

Question 6

investment banks

Answer 6

Institutions that assist companies in raising capital, advise firms on major transactions such as mergers or financial restructurings, and engage in trading and market making activities.

Question 7

Glass-Steagall Act

Answer 7

An act of Congress in 1933 that created the federal deposit insurance program and separated the activities of commercial and investment banks.

Question 8

shadow banking system

Answer 8

A group of institutions that engage in lending activities, much like traditional banks, but do not accept deposits and therefore are not subject to the same regulations as traditional banks.

Question 9

Financial markets

Answer 9

are forums in which suppliers of funds and demanders of funds can transact business directly.

Question 10

money market

Answer 10

short-term debt instruments;marketable securities

Question 11

capital market

Answer 11

long-term securities-bonds and stocks

Question 12

private placement

Answer 12

The sale of a new security directly to an investor or group of investors.

Question 13

public offering

Answer 13

the sale of either bonds or stocks to the general public

Question 14

primary market

Answer 14

financial market in which securities are initially issued: the only market in which the issuer is directly involved in the transaction

Question 15

secondary market

Answer 15

financial market in which preowened securities are traded; original company is not invloved

Question 16

the money market

Answer 16

is created by a financial relationship between suppliers and demanders of short-term funds

Question 17

capital market

Answer 17

is a market that enables suppliers and demanders of long-term funds to make transactions

Question 18

bonds

Answer 18

are long-term debt instruments used by business and government to raise large sums of money

Question 19

preferred stock

Answer 19

A special form of ownership having a fixed periodic dividend that must be paid prior to payment of any dividends to common stockholders.

Question 20

How securities are traded

Answer 20

through broker markets and dealer markets

Question 21

the difference between broker and dealer market

Answer 21

is a technical point dealing with the way trades are executed

Question 22

broker market

Answer 22

The securities exchanges on which the two sides of a transaction, the buyer and seller, are brought together to trade securities.

Question 23

securities exchanges

Answer 23

Organizations that provide the marketplace in which firms can raise funds through the sale of new securities and purchasers can resell securities.

Question 24

dealer market

Answer 24

the buyer and the seller are never brought directly but instead have their orders executed by securities dealers that “make markets” in the given security

Question 25

market makers

Answer 25

securities dealers who “make markets” by offering to buy or sell certain securities at stated prices
-linked together via mass-telecommunications network

Question 26

bid price

Answer 26

the highest price offered to purchase a security

Question 27

ask price

Answer 27

the lowest price at which a security is offered

Question 28

efficient markets

Answer 28

a market that establishes correct prices for the securities that firms sell and allocates funds to their most productive uses

Question 29

foreign bond

Answer 29

A bond that is issued by a foreign corporation or government and is denominated in the investor’s home currency and sold in the investor’s home market.

Question 30

international equity market

Answer 30

A market that allows corporations to sell blocks of shares to investors in a number of different countries simultaneously

Question 31

securitization

Answer 31

refers to the process of pooling mortgages or other types of loans and then selling claims or securities against that pool in a secondary market

Question 32

Federal Deposit Insurance Corporation (FDIC)

Answer 32

which provided deposit insurance, effectively guaranteeing that individuals would not lose their money if they it in a bank that failed

Question 33

Gamm-Leach-Bliley act

Answer 33

which allows commercial banks, investment banks and insurance companies to consolidate and compete for business in a wider range of activities

Question 34

Securities and Exchange Commission (SEC)

Answer 34

The primary government agency responsible for enforcing federal securities laws.

Question 35

two types of income

Answer 35

ordinary and capital gains

Question 36

ordinary income

Answer 36

income earned through the sale of a firm’s goods or service

Question 37

marginal tax rate

Answer 37

represents the rate at which the next dollar of income is taxed

Question 38

average tax rate

Answer 38

a firm’s taxes divided by its taxable income

Question 39

double taxation

Answer 39

which occurs when the already once-taxed earnings of a corporation are distributed as cash dividends to stockholders, who must pay taxes on dividends up to a maximum rate of 15 percent

Question 40

capital gains

Answer 40

the amount by which the sale price of an asset exceeds the asset’s purchace price