class 1 Flashcards
what is a financial system?
the set of financial markets and institutions used for financial contracting and the exchange of assets and risks
what are the 3 things that make up financial systems?
financial markets
financial intermediaries
regulatory bodies
who are the 4 players in the financial system?
households
business firms
financial intermediaries
governments
what is the goal of the financial system?
to satisfy peoples consumption preferences
what are the 2 kinds of financing in the financial system?
direct finance (financial markets)
indirect finance (financial intermediaries)
what is direct financing?
when funding comes directly from lenders/ savers and borrowers/ spenders sell a new security, the security can be a debt instrument (bond) or a equity instrument (shares)
what is indirect financing?
when financial intermediaries borrow funds from lenders/savers and use those funds to make loans to borrower/spenders
what are financial markets?
places where financial transactions take place
what is the goal of financial markets?
to channel funds from economic players that have surplus funds to those that have a shortage
what are the 3 important roles financial markets play in the economy?
efficient allocation of capital/resources
allows consumers to time their purchases
allows for risk sharing between agents
what are the 4 ways financial markets can be categorized?
debt markets, equity markets and derivatives market (based on the type of financial assets)
primary and secondary markets
exchanges and over the counter markets
money and capital markets
what is an asset?
something that is owned by a business, institution, partnership or individual that has monetary value
what are the 2 types of assets?
physical assets (real assets)
financial assets (securities)
what is the key difference between physical assets and financial assets?
physical assets are income generating assets that produce goods or services (land or machines)
financial assets represent claims against the income generated by physical/real assets (securities, financial instruments or debt instruments)
what are the 4 assets sold on the debt market?
bonds
mortgages
consumer loans
commercial loans
what asset is sold on the equity market?
stocks, common and preferred
what 2 assets are sold on the derivatives market?
futures
options
what is a bond?
a debt security that promises to make payments periodically for a specified period of time
who issues a bond?
the borrower
what are the 3 periods until maturity of a bond?
short term, less than 1 year
intermediate term, 1-10 years
long term, more than 10 years
what happens when a bond reaches its maturity date?
at the maturity date the bond becomes due for payment and the face value is returned to the investor
what is face value of a bond?
the amount that is payed out when the bond reaches maturity
if the face value of a bond is 10,000, how much will the bond payout when it reaches its maturity date?
10,000
what are future coupons of a bond?
the periodic payments that the bond pays out