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ECON2026 > Introduction > Flashcards

Introduction Flashcards

1
Q

What is the purpose of financial markets?

A
  • Purpose: Matchmakers

- Remove economic inefficiencies: lack of matchmaking

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2
Q

What is a security and who are the involved parties?

A
  • A claim on the issuer’s future income or assets
  • Holder of security
    • Supplier of funds
  • Issuer of security
    • Demander of funds
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3
Q

What types of securities are there?

A
  • Bonds
    • Debt finance
  • Equities/Stocks
    • Equity finance
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4
Q

What is the first asymmetric information encountered?

A
  • (before the transaction) Adverse Selection: try to avoid selecting the risky borower
    • Need to screen
    • Gather information about potential borrower
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5
Q

What is the second asymmetric information encountered?

A
  • (after the transaction) Moral Hazard: ensure borrower will not engage in activities that will prevent them from repaying
    • Need to monitor
    • Sign a contract with restrictive covenants
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6
Q

What is a bond?

A

A debt security that promises to make payments periodically for a specified period of time

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7
Q

What are interest rates and what accounts for the differences between them?

A
  • The cost of borrowing or the price paid for the rental of funds
  • Differences in rates
    • Different maturities
    • Different risk associated
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8
Q

What kinds of stocks are there?

A
  • Common stock
    • Represents a share of ownership in a corporation
  • A share of stock
    • A claim on the residual earnings and assets of the corporation
      • All debts must be paid before paid out
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9
Q

What describes financial crises?

A

Major disruptions to financial markets that are characterised by sharp declines in asset price and the failures of many financial and non-financial firms

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10
Q

What is the relationship between money and the business cycle?

A

Money has a role in generating business cycles

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11
Q

What is indirect finance?

A

Through intermediaries

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12
Q

What is maturity?

A

Maturity: number of years until the expiration date

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13
Q

What comprises and what are the differences between primary and secondary markets?

A
  • Investment banks underwrite securities in primary markets
    • New issues of securities
  • Brokers and dealers work in secondary markets
    • Sale of existing securities
    • Exchanges and OTC markets
      • Exchanges: NYSE
      • OTC Markets (e.g. Federal Funds Market)_
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14
Q

What are money and capital markets?

A
  • Money markets deal in short term debt instruments

- Capital markets deal in longer term debt and equity instruments

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15
Q

What are the differences between the international assets?

A
  • Foreign Bonds: Sold in a foreign country and denominated in that country’s currency
  • Eurobond: Bond denominated in a currency other than that of the country in which it is sold
  • Eurocurrencies: foreign currencies deposited in banks outside the home country
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16
Q

Why/How regulate?

A
  • T0 increase information available to ivnestors
    • Reduce adverse selection and moral hazard problems
    • Reduce insider trading
  • To ensure the soundness of financial intermediaries
    • Restrictions on entry (chartering process)
    • Disclosure of information
    • Restrictions on Assets and Activities (control holding of risky assets)
    • Deposit Insurance (avoid bank runs)
17
Q

What is money and what is it not?

A
  • Anything that is generally accepted in payment for goods or services or in the repayment of debts
  • Money (a stock concept) is different from:
    • Wealth
      • The total collection of pieces of property that serve to store value
    • Income
      • Flow of earnings per unit of time
      • Flow concept
18
Q

What are the characteristics of money?

A
  • Medium of Exchange
  • Unit of account
  • Store of value
19
Q

What is M1?

A

M1 (most liquid assets) = currency + traveler’s checks + demand deposits + other checkable deposits

20
Q

What is M2?

A

M2 = M1 + small denomination time deposits + saving deposits and money market deposit accounts + money market mutual fund shares.

Components grow faster than M1

21
Q

What is true about the metric of money measurement?

A

M1 & M2 can move in different direction in short run

22
Q

What is return?

A

Revenue (principal) + Profit, NOT JUST PROFIT

23
Q

What is rate of change?

A

(New - old)/old

24
Q

What effect do stock prices have on firms?

A

Changes in stock prices affect a firm’s ability to raise funds, and thus their investment.

25
Q

Why is the bond market important?

A

The bond market supports economic activity by enabling the government and corporations to borrow to undertake their projects

26
Q

What is the money growth/business cycle relationship?

A

Prior to almost every recession in the U.S. the money growth rate has declined; however, not every decline is followed by a recession.

27
Q

Why are most US dollars outside the US?

A

Concern about high inflation eroding the value of their own currency causes many people in foreign countries to hold U.S. dollars as a hedge against inflation risk

28
Q

What is the most important fact about return?

A

It’s a %

ECON2026 (8 decks)

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