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What is the key activity of financial markets?

Financial markets are crucial to promoting greater economic efficiency by channeling funds to its most productive use.

definition: bond

Debt security that promises to make payments periodically for a specified period of time.

definition: capital

Physical or financial wealth employed to produce more wealth.

definition: underwriting securities

Investment banks buy a corporation's securities for a predetermined price in the primary market. Afterwards they sell them to the public.

What are the characteristics of the money market?

  • only are traded
  • compared to the capital market the prices experience
  • money market instruments are used by corporations/ banks to earn

What are the characteristics of the capital market?

  • longer-term
  • greater fluctuations
  • less liquid

definition: certificate of deposit

A debt instrument sold by banks to its depositors. The difference to saving accounts is that it has a fixed maturity and often a fixed interest rate. Therefore it operates similar to a coupon bond.

definition: commercial paper

A debt instrument that is issued by large banks and corporations to obtain funds to meet short-term debt obligations. Its market capitalization increased by over 1200% during the period from 1980 to 2010.

list the different money market instruments

  • U.S. Treasury Bill
  • certificate of deposit
  • commercial paper
  • repurchase agreements (repos)
  • federal funds

list the different capital market instruments

  • stocks
  • mortgages
  • mortgage-backed securities
  • corporate bonds
  • U.S. Government securities
  • State / Local government bonds
  • consumer / bank commercial loans

definition: Eurobond

A bond that is denominated in any currency other than of the country it is sold in.

definition: foreign bond

A bond that is sold by a domestic government/ corporation in a foreign country and denominated in the foreign country's currency.

definition: Eurocurrencies

Currencies deposited in banks outside the home country.

(Home country -> currency is the common currency)

How do financial intermediaries engage in asset-transformation?

They create and sell assets with risk characteristics people are comfortable with and use the aquired funds to invest in riskier assets.

definition: moral hazard

The risk the lender takes that the borrower might engage in activities that are undesirable from the lender's point.

definition: credit unions

Very small cooperative lending institutions that serve a particular group of clients and operate in a similar fashion to a commercial bank.

characteristics: contractual savings institutions

  • aquire funds at on contractual basis
  • invest primarily in
  • life-insurance companies
  • pension funds and government retirement funds

list: investment intermediaries

  • finance companies
  • mutual funds
  • money market mutual funds
  • investment banks