Financial System Definitions Flashcards
Adverse Selection
Problem created by asymmetric information before the transaction.
e.g. not knowing how risky a debtor is.
Asset Transformation
Process that turns risky assets into safer assets by creating and selling assets with risk characteristics that people are comfortable with (using the funds from those sales to buy risky assets) AKA RISK SHARING.
Brokers
Agents of investors who match buyers with sellers.
Capital
Wealth that is employed to produce more wealth.
Capital Market
Market where longer-term debt and equity instruments are traded.
Dealers
People who link buyers to sellers by buying and re-selling securities at stated prices.
Default
When the party issuing the debt instrument is unable to make interest payments or pay off the amount owed at maturity.
Diversification
Investing in a collection of assets which returns’ do not always move together to reduce default risk.
Dividends
Periodic payments made by equities to shareholders.
Economies of Scale
Reduction in transaction costs of the transaction per dollar as the size of transaction increases.
Equity
Claims to share in the net income and assets of a corporation.
Eurobond
Bonds denominated in a currency different to that of the country in which it is sold.
Eurocurrency
Foreign currencies deposited in banks outside the home country.
Eurodollars
US dollars deposited in foreign banks outside the US or in the foreign branches of US banks.
Centralized Exchanges
Secondary markets in which buyers and sellers of securities meet in one central location to conduct trades.
Federal Funds Rates
The interest rate on overnight loans of deposits at the Fed.
Financial Intermediation
Process of indirect finance whereby financial intermediaries link lender-savers with borrowers spenders.
Financial Panic
Widespread collapse of financial markets and intermediaries in an economy.
Foreign Bonds
Bonds sold in a foreign country and denominated in that country’s currency.
Investment Bank
Firms that assist in the initial sale of securities in the primary market.
Liabilities
IOUs (written acknowledgement of debt) or debts.
Liquidity Services
Services that financial intermediaries provide to their customers to ease transactions.
Maturity
The time to the expiration date of a debt instrument.
Money Market
A financial market in which only short-term debt instruments are traded.
Moral Hazard
The risk that one party to a transaction will engage in behavior that is undesirable from the other party’s point of view.
Mortgage-backed Securities
Securities that cheaply bundle and quantify the default risk of the underlying high-risk mortgages.
Mortgages
Loans to households or firms that wish to purchase housing, land, or the real structures; the structure or land itself serves as collateral for the loan.
Over-the-counter Market
Secondary market in which dealers at different locations who have an inventory of securities to any individual willing and able to pay.
Portfolio
A collection or group of assets.
Primary Market
Financial market in which new issues of a security are sold to initial buyers.
Risk
The degree of uncertainty associated with the return on an asset.
Thrift Institutions
Savings and loan associations, mutual savings banks, and credit unions.
Transaction Costs
The time and money spent trying to exchange financial assets, goods, or services.
Underwrite
To purchase securities from a corporation at a predetermined price and then resell them in the market.
Underwriting
Guaranteeing the price of a corporation’s securities and then selling them to the public.
