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)
examples of depository institutions
banks, credit unions, savings and loans. they pay int. on customer deposits and provide transaction services such as checking accounts
insurance companies - primary or intermediary?
intermediary that collect insurance premiums in return for providing risk reduction to insured
define moral hazard
when insured may take more risks once is he is protected against losses
define adverse selection
when most likely to experience losses are most likely to buy insurance
define arbitrage
buying an asset in one market and reselling in another at a higher price
define clearing house
intermediaries btwn buyer and seller for things like escrow services
define counterparty risk
risk that other party to transaction will not fulfill obligation
LONG v. SHORT Position
long = right/obligation to purchase an asset, short = right/obligation to replace asset in future
define payment in lieu of dividends
in a short sale, when short seller must pay all div to lender
define short rebate rate
rate that broker would earn from interest on funds
define leverage position
use of borrowed funds to purchase and asset
define buying on margin
investors who use leverage to buy securities by borrowing from their brokers
define call money rate
interest rate paid on leveraged funds - generally higher than govt’ bill rate, but lower for larger investors with better collateral
define initial margin requirement
min. amt of equity for new margin purchase
who decides the amt for initial margin requirement?
govt, exchange, broker or clearinghouse
define leverage ratio
value of asset / value of equity position
