Chapter 2
In a well functioning economy, capital will flow efficiently from those who supply capital to those who demand it. This transfer of capital can take place in three different ways:
(1) direct transfer (2) primary market transfer (3) financial intermediary
Stocks are traded using a variety of market procedures, but there are two basic types:
(1) physical location exchanges (2) electronic dealer-based markets
Physical Asset Markets
(also called "tangible" or "real" asset markets) are for products such as wheat, autos, real estate, computers, and machinery.
Closely Held, Corporations
A corporation that is owned by a few individuals who are typically associated with the firm's management.
Publicly Owned Corporations
A corporation that is owned by a relatively large number of individuals who are not actively involved in the firm's management.
Financial Services Corporations
A firm that offers a wide range of financial services, including investment banking, brokerage operations, insurance, and commercial banking.
Over-The-Counter (OTC) Market
A large collection of brokers and dealers, connected electronically by telephones and computers, that provides for trading in unlisted securities.
Investment Banks
An organization that underwrites and distributes new investment securities and helps businesses obtain financing.
Indexed Funds
Are designed to simply replicate the performance of a specific market index.
Private Equity Companies
Are organizations that operate much like hedge funds; but rather than purchasing some of the stock of a firm, private equity players buy and then manage entire firms.
Hedge Funds
Are similar to mutual funds because they accept money from savers and use the funds to buy various securities. However, unlike mutual funds, these funds are unregulated.
Exchange Traded Funds (ETFs)
Are similar to regular mutual funds and are often operated by mutual fund companies, and buy a portfolio of stocks of a certain type
Direct Transfer
Business sells its stocks or bonds directly to savers, without going through any type of financial institution
Primary Market Transfer
Businesses use financial institutions as a middleman to sell securities to savers
Common stocks are examples of which type of market securities?
Capital Market Securities
Long-term corporate bonds are examples of which type of market securities?
Capital Market Securities
Preferred stocks are examples of which type of market securities?
Capital Market Securities
Credit Unions
Cooperative associations whose members are supposed to have a common bond, such as being employees of the same firm.
In a _______ members' savings are loaned only to other members, generally for auto purchases, home improvement loans, and home mortgages.
Credit Union
What are often the cheapest source of funds available to individual borrowers?
Credit Unions
Financial Markets
Deal with stocks, bonds, notes, mortgages, and derivative securities.
If a stock trades infrequently and has above average volatility, we would expect it to have a smaller than average bid-ask spread. True or false?
False
Physical Location exchanges
Formal organizations having tangible physical locations that conduct auction markets in designated ("listed") securities.
What type of market is being used if a farmer enters into a futures contract in which he agrees today to sell 5,000 bushels of soybeans 6 months from now at a price of $13.75 a bushel
Future Market
Dealer Markets
Includes all facilities that are needed to conduct security transactions not conducted on the physical location exchanges.
Financial Intermediary
Intermediaries obtain funds from savers in exchange for their own securities. The intermediary uses this money to buy and hold businesses' securities, while the saver holds the intermediaries securities
Which type of banks (1) help corporations design securities with features that are currently attractive to investors, (2) buy these securities from the corporation, (3) and resell them to savers.
Investment Banks
Initial Public Offering (IPO)
Is a stock issue in which privately held firms go public.
Primary Market
Markets in which corporations raise capital by issuing new securities
Secondary Markets
Markets in which securities and other financial assets are traded among investors after they have been issued by corporations
Public Markets
Markets in which standardized contracts are traded on organized exchanges
Private Markets
Markets in which transactions are worked out directly between two parties
A U.S. Treasury bill is an example of which type of market security?
Money Market Security
Dealer commercial paper is an example of which type of security?
Money Market Security
Money Market Funds
Mutual funds that invest in short-term, low-risk securities and allow investors to write checks against their accounts.
Mutual Funds
Organizations that pool investor funds to purchase financial instruments and thus reduce risks through diversification.
An initial public offering (IPO) is an example of which type of market transaction?
Primary Market Transaction
What type of market transaction would take place if GE were to sell a new issue of common stock to raise capital and receives the proceeds from the sale ?
Primary Market Transaction
Bank loans and private debt placements with insurance companies are examples of which type of market transactions?
Private Market Transactions
Pension Funds
Retirement plans funded by corporations or government agencies for their workers and administered primarily by the trust departments of commercial banks or by life insurance companies.
If Jane Doe decided to buy 1,000 shares of GE stock, the purchase would occur in what type of market?
Secondary Market
Suppose you just purchased 10 shares of GE stock in the open market. Which of the following statements best describes the transaction?
Secondary Market Transaction
The most active secondary market where the prices of firms' stocks are established.
Stock Market
Life Insurance Companies
Take savings in the form of annual premiums; invest these funds in stocks, bonds, real estate, and mortgages; and make payments to the beneficiaries of the insured parties.
Going Public
The act of selling stock to the public at large by a closely held corporation or its principal stockholders.
Capital Markets
The financial markets for stocks and for intermediate- or long-term debt (one year or longer)
Money Markets
The financial markets in which funds are borrowed or loaned for short periods (less than one year)
Spot Markets
The markets in which assets are bought or sold for "on-the-spot" delivery (literally within a couple of days)
Future Markets
The markets in which participants agree today to buy or sell an asset at some future date
How does a cost-efficient capital market help reduce the prices of goods and services?
The prices of goods and services must cover costs. Costs include: labor, materials, and capital. Capital costs to a borrower include a return to the saver who supplied the capital, plus a markup (called a "spread") for the financial intermediary that brings the saver and the borrower together. The more efficient the financial system, the lower the costs of intermediation, the lower the costs to the borrower, and, hence, the lower the prices of goods and services.
Commercial Banks
The traditional department store of finance serving a variety of savers and borrowers.
Derivatives are financial assets (such as options and futures) whose values are derived from the values of some other "underlying" assets. They can be used either to reduce risks or to speculate. True or false?
True
Financial intermediaries such as banks and mutual funds help transfer capital from those with a surplus of funds to those who need capital. True or false?
True
In Google's IPO, it conducted a Dutch auction where investors directly place bids for shares of stock. In a Dutch auction, the actual transaction price is set at the highest price that causes all of the offered shares to be purchased. Investors who submitted bids at or above this clearing price received shares of the company's stock. True or false?
True
While Nasdaq began as a system that simply provided quotations on stocks, it has grown to the point where it is an organized securities market with its own listing requirements. True or False?
True
Actively managed funds
Try to outperform the overall markets.
Derivative Securities
Values are derived from changes in the prices of other assets
An option to buy Ford shares, whose value depends on the price of Ford stock, is an example of
a derivative security
A share of Ford stock is an example of
a pure financial asset
Pension funds invest primarily in:
bonds, stocks, mortgages, and real estate.