Lecture 1 Flashcards

1
Q

What do common stocks represent?

A

Share of ownership in corporation

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2
Q

What is a share of stock?

A

A claim on residual earnings and assets of the firm

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3
Q

What is the FOREX?

A

Foreign exchange market where funds converted from one currency into another

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4
Q

Functions of financial markets

A
  • 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
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5
Q

Debt and equity markets

A
  • Debt instruments (maturity)

- Equities (dividends)

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6
Q

Primary and secondary markets

A
  • Investment banks underwrite securities in primary markets.

- Brokers and dealers work in secondary markets.

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7
Q

Money and capital markets

A

» Money markets deal in short-term debt instrument.

» Capital markets deal in longer-term debt and equity instruments

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8
Q

Money market instruments

A
  • Treasury bills
  • Negotiable bank certificates of deposit (large denominations)
  • Commercial paper
  • Repurchase agreements
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9
Q

Capital market instruments

A
  • Corporate stocks (market value)
  • Residential mortgages
  • Commercial and farm mortgages
  • Gilts or government securities
  • Corporate bonds
  • Bank commercial loans
  • Consumer loans
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10
Q

What are Financial intermediaries?

Examples?

A

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
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11
Q

Function of Financial Intermediaries

A

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.

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