Reading #46 Flashcards
Three main functions of the fin. system
- allow entities to save & borrow money 2. determine returns that = supply and demand 3. allocate capital to most efficient use
equilibrium int. rate
rate which amt of individ., bus, and govt desire to borrow = desire to lend
define debt securities
promises to repay funds
define equity securities
represent ownership positions
define derivative contracts
values depend on values of other assets
financial derivative contracts versus physical der. contracts
financial based on equities, debt, etc, physical based on value of gold, oil, wheat, etc
define spot market
markets for immediate delivery
primary versus secondary market
primary is for newly issued securities vs subsequent sales is secondary market
money market vs. capital market
money market is for less than year, capital is for longer term debt and equity securities
traditional investment markets vs alt. markets
trad = debt and equity, alt = hedge funds and etc
define common stock
residual claim on firm’s assets
definte preferred stock
equity security with scheduled dividends that do not change usually over security’s life
define warrants
similar to options (giving right to buy firm’s equity shares) at fixed exercise price prior to expiration
types of pooled investment vehicles
mutual funds, depositories, and hedge funds
forward vs future contract
forward is agreement to buy sell asset in future as specific price and not traded on exchanges. future is standardized so that they are liquid investments
define swap contract
2 parties make equal payments to one asset being traded for another .(currency swap = one loan in 1 currency for loan of another currency)
define option contract
gives owner right to buy or sell asset at specific exercise price at some specified time in the future
CALL VS PUT Option
call = gives buyer right to buy option, put = right to sell the
define insurance contract
pays cash amt if future event occurs
define credit default swaps
form of insurance that makes a payment if an issuer defaults on its bonds
define a financial intermediary
stands between buyer and seller
define a dealer
they facilitate trading by buying for or selling from their own inventory
define broker-dealer
they seek best prices but goal is to profit through prices or spreads
define securitizer
pool large amounts of securities and then sell interest in the pool to other investors (ex. mortgages)