fina 410 ch1 vocab51 cards

Tagged as: economics, music, accounting, finance, government, nursing, business, act, computer science

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1

• Financial Markets

are structures through which funds flow

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o Primary markets

markets in which users of funds raise funds through new issues of financial instruments, such as stocks and bonds

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o Secondary markets

markets that trade financial instruments once they are issued

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o Money markets

markets that trade debt securities or instruments with maturities of less than 1 year

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o Capital markets-

markets that trade debt and equity instruments with maturities of more than 1 year

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o Foreign exchange markets

markets in which cash flows from the sale of products or assets denominated in a foreign currency are transacted

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o Derivative markets

markets in which derivative securities trade

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• Initial public offering (IPO)-

public issues of financial instruments by a firm

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• Derivative securities

financial securities whose payoffs are linked to other, previously issued primary securities

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• Derivative security market

markets in which derivatives are traded

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• Over the counter markets (OTC

markets that do not operate in a specific fixed location-rather, transactions occur via telephones, wire transfers, and computer trading

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o Treasury bills

short term obligations issued by the U.S. government

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o Federal funds

short term funds transferred between financial institutions usually for no more than one day

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o Repurchase agreements

agreements involving the sale of securities by one party to another with a promise by the seller to repurchase the same securities from the buyer at a specified date and price

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o Commercial paper

- short term unsecured promissory notes issued by a company to raise short term cash

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o Negotiable certificate of deposit-

bank issued time deposit that specifies an interest rate and maturity date and is negotiable

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o Bankers acceptance

time draft payable to seller of goods, with payment guaranteed by a bank

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o Corporate stock

fundamental ownership claim in a public corporation

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o Mortgages

loans to individuals or businesses to purchase a home, land, or other real property

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o Corporate bonds

long term bonds issued by corporations

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o Treasury bonds-

long term bonds issued by the U.S. Treasury

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o State and local government bonds

long term bonds issued by state and local governments

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o U.S. government agencies

long term bonds collateralized by a pool of assets and issued by agencies of the U.S. government

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o Bank and consumer loans

loans to commercial banks and individuals

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• Financial institutions

perform the essential function of channeling funds from those with surplus funds to those with shortages of funds

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o Commercial banks

depository institutions whose major assets are loans and whose major liabilities are deposits

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o Thrifts

depository institutions in the form of saving associations, saving banks, and credit unions (focus on loans)

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o Insurance companies

financial institutions that protect individuals and corporations from adverse events

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o Securities firms and investment banks

financial institutions that help firms issue securities and engage in related activities such a securities brokerage and securities trading

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o Finance companies

financial intermediaries that make loans to both individuals and businesses

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o Mutual funds

institutions that pool financial resources of individuals and companies and invest those resources in diversified portfolios of assets

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o Hedge funds

financial institutions that pool funds from a limited number of wealthy individuals and other investors and invest these funds on their behalf, usually keeping a large proportion of any upside return and charging a fee on the amount invested

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o Pension funds

financial institutions that offer savings plans through which fund participants accumulate savings during their working years withdrawing them during their retirement years

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• Direct transfer

a corporation sells its stock or debt directly to investors without going through a financial institution

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• Indirect transfer

a transfer of funds between suppliers and users of funds through a financial intermediary

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• Liquidity

ease with which an asset can be converted into cash at its fair market value

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• Price risk

risk that an asset’s sale price will be lower than its purchase price

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 Monitoring cost

aggregation of funds in an FI provides greater incentive to collect a firms info and monitor actions

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 Liquidity and price risk

FIs provide financial claims to household savers with superior liquidity attributes and with lower price risk

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 Transaction cost services

similar to economies of scale in information production costs, an FIs size can result in economies of scale in transaction cost

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 Maturity intermediation

FI can better bear the risk of mismatching the maturities of their assets and liabilities

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 Denomination intermediation

FIs such as mutual funds allow small investors to overcome constraints to buying assets imposed by large minimum denomination size

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 Money supply transmission

depository institutions are the conduit through which monetary policy actions impact the rest of the financial system and the economy in general

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 Credit allocation

FIs are often visited as the major, and sometimes only, source of financing for a particular sector of the economy, such as farming and residential real estate

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 Intergenerational wealth transfers

FIs, especially life insurance companies and pension funds, provide savers with the ability to transfer wealth from one generation to the next

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 Payment services

the efficiency with which depository institutions provide payment services directly benefits the economy

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• Delegation monitor

- economic agent appointed to act on behalf of smaller investors in collecting info and/or investing funds on their behalf

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• Asset transformers

financial claims issued by an FI that are more attractive to investors than are the claims directly issued by corporations

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• Diversify

ability of an economic agent to reduce risk by holding a number of securities in a portfolio

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• Economies of scale

concept that cost reduction in trading and other transaction service results from increased efficiency when FIs perform these services

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• Etrade

buying and selling shares on the internet