Chapters 2

Question 1

Commercial Banks

Answer 1

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

Question 2

Investment Bank

Answer 2

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 3

Shadow Banking System

Answer 3

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 4

Financial Markets

Answer 4

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

Question 5

Private Placement

Answer 5

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

Question 6

Public Offering

Answer 6

The sale of either bonds or stocks to the general public.

Question 7

Primary Market

Answer 7

Financial market in which securities are initially issued; the only market in which the issuer is directly involved in the transaction.

Question 8

Secondary Market

Answer 8

Financial market in which preowned securities (those that are not new issues) are traded.

Question 9

Money Market

Answer 9

A financial relationship created between suppliers and demanders of short term funds.

Question 10

Marketable Securities

Answer 10

Short-term debt instruments, such as US Treasury Bills, commercial paper, and negotiable certificates of deposit issued by the government, business, and financial institutions, respectively.

Question 11

Capital Market

Answer 11

A market that enables suppliers and demanders of long-term fund to make transactions.

Question 12

Bond

Answer 12

Long-term debt instrument used by business and government to raise large sums of money, generally from a diverse group of lenders.

Question 13

Preferred Stock

Answer 13

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

Question 14

Broker Market

Answer 14

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

Question 15

Securities Exchanges

Answer 15

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

Question 16

Dealer Market

Answer 16

The market in which the buyer and seller are not brought together directly but instead have their orders executed by securities dealers that “make markets” in the given security.

Question 17

Market Makers

Answer 17

Securities dealers who “make markets” by offering to buy or sell certain securities at stated prices.

Question 18

Nasdaq Market

Answer 18

An all-electronic trading platform used to execute securities trades.

Question 19

Over-The-Counter Market

Answer 19

Market where smaller, unlisted securities are traded.

Question 20

Bid Price

Answer 20

The highest price offered to purchase a security.

Question 21

Ask Price

Answer 21

The lowest price at which a security is offered for sale.

Question 22

Efficient Market

Answer 22

Establishes correct prices for the securities that firms sell and allocates funds to their most productive uses.

Question 23

Securitization

Answer 23

The process of pooling mortgages or other types of loans and selling claims or securities against that pool in the secondary market.

Question 24

Mortgage-Backed Securities

Answer 24

Represent claims on the cash flows generated by a pool of mortgages.

Question 25

Marginal Tax Rate

Answer 25

The rate at which additional income is taxed.

Question 26

Average Tax Rate

Answer 26

A firm’s taxes divided by its taxable income.

Question 27

Double Taxation

Answer 27

Situation that occurs when after-tax corporate earnings are distributed as cash dividends to stockholders, who then must pay personal taxes on the dividend aount.

Question 28

Capital Gain

Answer 28

The amount by which the sale price of an asset exceeds the asset’s purchase price.

Question 29

Financial Institution

Answer 29

An intermediary that channels the savings of individuals, businesses, and governments into loans or investments.