Chapters 1 and 2 Flashcards
bonds
debt securities that promise to make payments periodically for a specific amount of time
Banks
financial institutions that accepts deposits and makes loans.
central bank
The most important part of the financial system. In the US it is the Fed. The central bank is the government agency that controls monetary policy / money supply.
Federal Bank
Central Bank of the US that controls monetary policy and monetary supply
e-finance
Delivering financial services electronically
financial crisis
major disruptions in financial markets that are characterized by large declines in assets prices and failures of many firms ( both financial and financial)
financial innovation
The development of new financial products and services . Could lead to a financial crisis but also lead to new technology and accessibility.
Assets
financial claim or piece of property that is subject to ownership
common stock
a share of ownership in a cooperation
financial intermediaries
institutions that borrow funds from people’s savings and transfer them to make loans to others.
Examples would include banks, insurance companies, mutual funds.
financial markets
markets in which funds are transferred from people who have excess available funds to people who have a shortage
foreign exchange market
the instrumental in moving funds between countries. A conversion in currencies often take place
foreign exchange rate
the rate which the price of one countries currency in terms of the other
interest rate
cost of borrowing or the price paid for rental funds
monetary policy
management of interest rates and quantity of money
money (money supply)
anything that is accepted in payment for goods and services or accepted for repayment of debt.
securities
claim on the issuer’s future income or assets
adverse selection
problem created by asymmetric information before a transaction occurs . For example, in the financial market, people with bad credit are the ones that actively seek out a loan, which results in them to be the group most likely to be selected.
asset transformation
the process of risk sharing where risky asset is transformed into safer assets for investors
asymmetric information
When one party does not know enough about the other party to make accurate decisions
brokers
agents of investors who match buyers and sellers of securities
capital
Wealth, either financial or physical, that is employed to produce more wealth
capital market
market which longer-term debt and equity instruments are traded
conflict of interests
a type of moral hazard that arises when a person or institution has multiple objects, which results in conflicting of objectives.
dealers
link buyers and sellers by buying and selling securities at stated prices
diversification
investing in a collection of assets whose return does not always go in the same direction ( don’t put all eggs in one basket )
dividends
Periodic payments made by equities to shareholders.
Eurobond
a bond denominated in a currency other than that of the currency in which it is sold. An example would be a bond denominated in USD but sold in China.
Eurocurrencies
foreign currencies deposited in banks outside the home country
Eurodollars
USD deposited in foreign banks outside of the US or in foreign branches in of the US bank. ( They are an important source of fund for American banks )
exchanges
buyers and sellers of securities meet in one central location to conduct trades
financial intermediation
The process of indirect finance whereby financial intermediaries link lender-savers and borrower-spenders
financial panic
widespread collapse of financial intermediaries often caused from asymmetric information.
foreign bonds
Foreigns bonds are bonds that are sold in a foreign country but denominated in that country’s currency.
intermediate-term
debt instruments with maturity between 1 and 10 years
investment bank
financial institution that assists initial sale of securities in the primary market through underwriting securities.
liabilities
debt
liquid
easily transferred into cash
liquidity services
services that make it easier for customers to conduct transactions. An example of this would be banks providing checking accounts.
long-term
10 years or longer
maturity
number of years (term) until that instrument’s expiration date
money market
financial market in which only short-term debt instruments are traded
moral hazard
problem created by asymmetric information after transactions occur ( ex: when one does not be careful with fire after getting a fire/ burning insurance)
over-the-counter market
dealers at different locations who have inventory of securities stand ready to buy and sell securities to anyone who comes to them and are willing to accept their prices. These are usually more competitive as they are often done through the computer and know the prices set by one another.
portfolio
a collection of assets
primary market
financial markets in which new issues of a security are sold to initial buyers by the corporation or government agency borrowing funds
risk
uncertainty about the returns investors will earn on assets
risk sharing
when financial intermediates create and sell assets with risk characteristics that people are comfortable with, and then use the funds they got to purchase other assets that have lower risk
secondary market
securities that have been previously issued can be resold
short-term
less than a year
thrift institutions
financial institutions that often accept deposits and transform them into loans (often times mortgages). These include credit unions, mutual savings banks, and saving and loan associations
transaction costs
time and money spent in carrying out financial transactions
underwriting
guaranteeing a price for a corporation’s securities and then sells it to the public
economies of scale
reduction in transaction costs per dollar of transaction as the size or scale of transaction increases. An example of this would be when a firm hires a lawyer to create a very good airtight contract for loans. This contract could be used over and over again for each loan transaction, thereby lowering the legal cost per transaction.
economies of scope
the lowering of cost of information production for each service by applying one information resource to many different services
equities
claims to share in the net income and assets of a business
