FInance chapter 3 and 4 note cards

Question 1

Financial market

Answer 1

A system that includes individuals, institutions, instruments, and procedures that bring together borrowers and savers. Primary role: facilitate flow of surplus funds to entities that need funds

Question 2

Direct transfer

Answer 2

When businesses sells its securities directly to savers

Question 3

Investment bank

Answer 3

Indirect transfer through an investment banker who recieves fees .Facilitates issuance of securities by buying and reselling them to investors. Design securities to make them attractive.

Question 4

Financial Intermediary

Answer 4

Indirect trasnfer through financial intermediary. Specialized financial firms that facilitate the indirect transfer of funds from savers to borowers by offering savings instruments, such as pension plans, Certificate of deposits etc. Helps reduce costs, risk diversification, funds divisibility/pooling, financial flexibility and other related services. Commercial banks,credit unions, mutual funds, insruance ompanies,.

Question 5

Commercial banks

Answer 5

“department stores of finance” that offer a variety of deposits, loans and other products ans services to a variety of customers especially businesses. Is a depository intermediary.

Question 6

Credit Union

Answer 6

A depsoitory insitution owned by depositors who have a common association such as an occupation or religion. Not for profit.

Question 7

Thrift Institutions ( Savings and loans associations, mutual savings banks)

Answer 7

cater to savers who have small amounts of money to depsoit or need long term loans to purchase houses

Question 8

Mutual funds

Answer 8

Investment comoanies that accept funds from saver to invest in financial assets such as stocks and bonds

Question 9

Money market mutual fund

Answer 9

A mutual fund that invests in short-term, low risk securities and allows investors to write checks against their accounts –> popular during economic downturn

Question 10

Whole life insurance companies

Answer 10

Firms that receive premiums from individuals; a portion of the funds is invested and a portion is used to cover the dependents of the insured

Question 11

Pensions

Answer 11

Employe retirement plans funded by corporations or govt. agencies

Question 12

economic efficiency 3

Answer 12

Funds are allocated to thgeir optimal use at the lowest costs in financial markets. Invest funds in assets that yeld highest returns and costs of searching for such opportunities is low

Question 13

Informational efficiency 3

Answer 13

The stock prices are at equilibrium and reflect existing information and adjust quickly when new information enters the markets. Weak form: past price movements fully reflected in current market prices. Semistrong: current market prices reflect all publically available info. Storng form: market prices reflect all pertinent info, public and private Many participants who

Question 14

Efficient market hypothesis 3

Answer 14

Securities are at equilibirum and fairly priced. One cannot consistently beat the market

Question 15

Money market vs. capital market 3

Answer 15

Short term (

Question 16

Debt markets vs. equity markets 3

Answer 16

Where loans are traded vs. where stocks are traded

Question 17

Derivatives market 3

Answer 17

Financial markets where options, future, and similar financial instruments are traded

Question 18

Primary markets 3

Answer 18

markets where firms isue new securities

Question 19

Secondary markets 3

Answer 19

markets where financial assets that have previously been issuued by various organizations are traded among investors

Question 20

Initial Public offering (IPO) 3

Answer 20

selling stock to general public for the first time by a corporation

Question 21

Physical security exchanges 3

Answer 21

formal organizations with physical locations that facilitate trading in designated( “listed”) securities e.g New Yrok Stock Exchange

Question 22

Over the Counter (OTC) market 3

Answer 22

a collection of brokers and dealers, connected electronically by telephones and computers that provides for trading in securities not listed in physical exchanges.

Question 23

NASDAQ 3

Answer 23

separate market and Computerized tarding system used by national association of security dealers licenses brokers and oversees trading practices. Included market makers who continuously monitor trading to ensure stocks are available to traders who want to buy them and ensures demand for those who want to sell

Question 24

Securities and Exchange Commission 3

Answer 24

The. U.S. govt. agency that regulates the issuance and trading of securities. Firms have to file for registratio statement and prospectus with SEC to issue new stock.

Question 25

Dual banking system

Answer 25

a banking system in which bank chartering exists at both national and state level

Question 26

Federal reserve system

Answer 26

The central banking system charged with mantaining the monetary policy of the U.S. Governed by Board of Governors. A decntralized network of regional, district banks. Provides services such as loans and deposits to banks and other financial institutions. The Fed is also used by the U.S. govt for its banking needs. The treasury maintains a checking accont at the Fed, which is used to collect taxes/

Question 27

Monetary policy

Answer 27

The policy by which the Fed influences economic conditions, especially interest rates, by mnging the nation’s money supply.Promote the goals of maximum employment, stable prices and moderate term interest rates

Question 28

Open market operations

Answer 28

operations in which Fed buys or sells Treasury securities to expand or contract U.S> money supply. When Fed sells govt securities, contract money supply, and vice versa

Question 29

Primary dealer

Answer 29

A dealer that has established a relationship with the Fed to buy and sell govt. securities

Question 30

Reserve requirements

Answer 30

Funds that a financial institution must retain in the vault to back customer deposits

Question 31

Discount rates

Answer 31

Charged by the Fed for loans it makes to banks to meet temporary shortages in required reserves. When Fed lowers discount rate, banks will tend to depend more on loans from Fed and bank can loan out more to indivduals and businesses.