Money background Flashcards
Money Market
A financial market in which only short-term debt instruments (generally those with original maturity of less than one year) are traded.
Primary market
A financial market in which new issues of a security, such as a bond or a stock, are sold to initial buyers by the corporation or government agency borrowing the funds.
Secondary market
A financial market in which securities that have been previously issued can be resold.
Capital market
A market in which longer-term debt (generally those with original maturity of one year or greater) and equity instruments are traded.
Debt market
A market where bonds or mortgages, which are contractual agreements by the borrower to pay the holder of the instrument fixed dollar amounts at regular intervals until a specified date when a final payment is made, are traded.
What is the difference between a mortgage and a mortgage-backed security?
Mortgages are loans, whereas mortgage-backed securities are bond-like debt instruments.
What are the functions of secondary markets?
Determining the price of the security that the issuing firm sells in the primary market; Providing information to borrowers and lenders about expectations and attitudes of the economic climate; Providing liquidity to owners of existing financial instruments
Agency Securities
These long-term bonds are issued by institutions such as Ginnie Mae, the Federal Farm Credit Bank, and the TVA. Many of these securities are guaranteed by the federal government.
Government securities
These long-term debt instruments are issued by the U.S. Treasury to finance the deficits of the federal government.
Mortgages
These are loans to households or firms to purchase housing, land, or other real structures, where the structure or land itself serves as collateral for the loans.
Stocks
These are equity claims on the net income and assets of a corporation.
Corporate bonds
These long-term bonds are issued by corporations with very strong credit ratings.
Eurobonds
A bond denominated in a currency other than that of the country in which it is soldlong dash—for example, a bond denominated in US dollars sold in London.
Foreign bonds
Bonds sold in a foreign country and denominated in that country’s currency.
Eurodollars
US dollars deposited in foreign banks outside the United States or in foreign branches of US banks.
Eurocurrency
Foreign currencies deposited in banks outside the home country.
How do financial intermediaries benefit by providing risk-sharing services?
They are able to earn a profit on the spread between the returns they earn on risky assets and the payments they make on the assets they have sold
Financial intermediaries have a role to play in matching savers and borrowers for all of the following reasons
risk sharing; minimizing transaction costs; economies of scale
How do conflicts of interest make the asymmetric information problem worse?
Competing interests may lead a financial institution to conceal information or disseminate misleading information, which prevents financial markets from channeling funds into the most productive investment opportunities.
Moral Hazard
A situation where the borrower might engage in activities that are undesirable from the lender’s point of view, because they make it less likely that the loan will be paid back.
lack of incentive to guard against risk where one is protected from its consequences, e.g. by insurance.
Adverse selection
Occurs when the potential borrowers who are the most likely to produce an undesirable are the ones who most actively seek out a loan and are thus most likely to be selected.
Adverse selection is when sellers have information that buyers do not have, or vice versa, about some aspect of product quality. It is thus the tendency of those in dangerous jobs or high-risk lifestyles to purchase life or disability insurance where chances are greater they will collect on it.
Asymmetric information
A situation where one party often does not know enough about the other party to make accurate decisions.
when one party in a transaction is in possession of more information than the other
Credit Union
These financial institutions are very small cooperative lending institutions organized around a particular group: union members, employees of a firm, and so forth. They acquire funds from deposits called shares and primarily make consumer loans.
Commercial Banks
These financial intermediaries raise funds primarily by issuing checkable deposits, savings deposits, and time deposits. They then use these funds to make commercial, consumer, and mortgage loans and to buy U.S. government securities and municipal bonds.
