Lesson 2 Flashcards
Where can firms obtain funds from?
1.Financial Institution
2. Financial Markets
3. Private Placement
What is financial institution?
is an INTERMEDIARIES by channeling SAVINGS of indiviuals into LOANS OR INVESTMENTS
- Accept savings then LEND money to others
- Accept savings then INVEST in earning assets like stocks or bonds
- Others do BOTH
Who are the key customers of financial institutions?
A.Individuals
B. Businesses
C. Governments
Who are the net SUPPPLIERS for financial institutions wherein they SAVE MORE money than they borrow?
Individuals
Who are net DEMANDERS of funds wherein they BORROW MORE money than they save?
Businesses and Governments
What institution provide savers with a SECURE place to INVEST funds and offer LOANS to ind. and business owners?
Commercial Banks
What institution assist companies in RAISING capital, ADVISES on major transactions and ENGAGE in trading?
Investment Banks
What is financial markets?
A FORUM where SUPPLIERS & DEMANDERS of funds can TRANSACT DIRECTLY.
What is a GROUP of institution that engage in LENDING activities, BUT do NOT accept DEPOSITS?
Shadow Banking System
What are the two key financial market?
- Money Market - (short-term or marketable securities)
- Capital Market - (long-term or bonds & stocks)
What is the sale of a new security DIRECTLY to an investor or group of investor?
Private Placement
What is the sale of either bonds or stocks to the public?
Public Offering
What is the financial market in which securities are INITIALLY issued?
Primary Market
What is the financial market in which PRE-OWNED securities are traded?
Secondary Market
What is the relationship between financial institution and markets?
Financial institutions actively participate in the financial markets as BOTH suppliers and demanders of funds
What is Interest Rate Fundamentals?
Represents the COST of money.
A COMPENSATION that a SUPPLIER of funds expects,
and a DEMANDER of funds must PAY.
Usually applied to debt instruments such as bank loans or bonds; OR the cost of BORROWING funds.
Interest Rate
What is the COST of funds obtained by SELLING an ownership interest?
Required return
What is the RISING trend in the prices of most goods and services?
Inflation
What is the general tendency for investors to prefer SHORT-term securities?
Liquidity Preference
What is the rate that creates EQUILIBRIUM between the supply of savings and the demand for investment funds in a PERFECT world?
Real Rate of Interest
What is the ACTUAL RATE of interest charged by the supplier of
funds and paid by the demander?
Nominal Rate of Interest
What is the relationship between the maturity and rate of
return for bonds with similar levels of risk?
Term Structure of Interest Rates
that is represented by a YIELD CURVE
What is the general trend of FALLING prices?
Deflation
What is the COMPOUND annual rate of return earned on a debt security purchased on a given day and HELD to maturity?
Yield to Maturity (YTM)
A DOWNWARD-sloping yield curve that indicates HIGHER SHORT-term
interest rates compare long-term interest rates?
Inverted Yield Curve
What is the Normal Yield Curve?
An UPWARD-sloping yield curve that indicates HIGHER LONG-term interest rates compare to short-term interest rates.
What is the Flat Yield Curve?
A yield curve that indicates that interest rates DO NOT VARY much
at different maturities.
What are the theories of term structure?
- Expectations Theory
- Liquidity Preference Theory
- Market Segmentation Theory
What is Expectations Theory?
A theory that the yield curve REFLECTS investor expectations
about future interest rates;
an expectation of RISING interest rates results in an UPWARD-sloping yield curve
and an expectation of DECLINING rates results in a DOWNWARD-sloping yield curve
What is Liquidity Preference Theory?
Theory suggesting that LONG-term rates are generally HIGHER than short-term (hence, the yield curve is upward sloping) because
investors perceive SHORT-term is MORE LIQUID and LESS RISKY than
long-term
Borrowers must offer HIGHER rates on LONG-term bonds to
entice investors away from their preferred short-term securities.
