Lecture 1 Flashcards
What do common stocks represent?
Share of ownership in corporation
What is a share of stock?
A claim on residual earnings and assets of the firm
What is the FOREX?
Foreign exchange market where funds converted from one currency into another
Functions of financial markets
- Channeling funds from economic players with surplus fund to those with shortage
- Direct finance : borrow fund direct from lenders in market by selling them securities
- Promotes economic efficiency
- Directly improve well-being of consumers by allowing them to time purchases better
Debt and equity markets
- Debt instruments (maturity)
- Equities (dividends)
Primary and secondary markets
- Investment banks underwrite securities in primary markets.
- Brokers and dealers work in secondary markets.
Money and capital markets
» Money markets deal in short-term debt instrument.
» Capital markets deal in longer-term debt and equity instruments
Money market instruments
- Treasury bills
- Negotiable bank certificates of deposit (large denominations)
- Commercial paper
- Repurchase agreements
Capital market instruments
- Corporate stocks (market value)
- Residential mortgages
- Commercial and farm mortgages
- Gilts or government securities
- Corporate bonds
- Bank commercial loans
- Consumer loans
What are Financial intermediaries?
Examples?
institutions that borrow funds from people who have saved and in turn make loans to people who need funds.
- Banks: accept deposits and make loans
- Other financial institutions: insurance companies, finance companies, pension funds, mutual funds and investment companies
Function of Financial Intermediaries
Lower transaction costs (time and money spent in carrying out financial transactions):
» Economies of scale.
» Liquidity services.
Reduce the exposure of investors to risk:
» Risk sharing (asset transformation).
» Diversification
Deal with asymmetric information problems:
» Adverse selection (before the transaction): try to avoid selecting the risky borrower by gathering information about them.
» Moral hazard (after the transaction): ensure borrower will not engage in activities that will prevent him or her to repay the loan. Sign a contract with restrictive covenants.