BA426 Ch2

Portfolio

A collection of assets.

Capital Market

A financial market in which longer-term debt (maturity of greater than one year) an equity instruments are traded.

Money Market

A financial market in which only short-term debt instruments (maturity of less than one year) are traded.

Secondary Market

A financial market in which securities that has previously been issued can be resold.

Conflicts Of Interest

A manifestation of moral hazard in which one party in a financial contract has incentives to act in its own interest, rather than in the interest of the other party.

Over-The-Counter Market

A secondary market in which dealers at different locations who have an inventory of securities stand ready to buy and sell securities to anyone who comes to them and is willing to accept their prices.

Investment Bank

A securities dealer who facilitates the transfer of securities from the original issuer to the public.

Brokers

Agents for investors who match buyers with sellers.

Eurobond

Bonds denominated in a currency other than that of the country in which they are sold.

Foreign Bonds

Bonds sold in a foreign country and denominated in that country's currency.

Equities

Claims to share in the net income and assets of a corporation.

Eurocurrecncies

Foreign currencies deposited I bank outside the home country.

Liquid

Easily converted into cash.

Underwriting

Guaranteeing prices o securities to corporations and then selling the securities to the public.

Liabilities

IOUs or debts.

Economies of Scope

Increased business that can be achieved by offering many products in one easy-to-reach location.

Diversification

Investing in a collection (portfolio) of assets whose returns do not always move together, with the result that overall risk is lower than for individual assets.

Dealers

People who link buyers with sellers by buying and selling securities at stated prices.

Dividends

Periodic payments made by equities to share holders.

Economies of Scale

Saving that can be achieved through increased size.

Thrift Institutions

Savings and loan associations, mutual saving banks, and credit unions.

Exchanges

Secondary markets in which buyers and sellers of securities (or their agents or brokers) meet in one central location to conduct trades.

Liquidity Services

Services that make it easier for customers to conduct transactions.

Risk

The degree of uncertainty associated with the return on an asset.

Asymmetric Information

The inequality of knowledge that each party to a transaction has about the other party.

Adverse Selection

The problem created by asymmetric information before a transaction occurs: the people who are the most undesirable from the other party's point of view are the ones who are most likely to want to engage in the financial transaction.

Risk Sharing

The process by which financial intermediaries create and sell assets with risk characteristics that people are comfortable with and then use the funds they acquire by selling these assets to purchase other assets that may have far more risk.

Asset Transformation

The process by which financial intermediaries turn risky assets into safer assets for investors by creating and selling assets with risk characteristics that people are comfortable with an then use the funds they acquire by selling these assets to purchase other assets that may have far more risk.

Financial Intermediation

The process of indirect finance where by financial intermediaries link lender-savers and borrower-spenders.

Moral Hazard

The risk that one party to a transaction will engage in behavior that is undesirable from the other party's point of view.

Transaction Costs

The time and money spent trying to exchange financial assets, goods, or services.

Financial Panic

The widespread collapse of financial markets and intermediaries I an economy.

Maturity

Time to the expiration date (maturity date) of a debt instrument.

Eurodollars

U.S. dollars that are deposited in foreign banks outside of the United States or in foreign branches of U.S. banks.

Capital

Wealth, either financial or physical, that is employed to produce more wealth.

Intermediate-Term

With reference to a debt instrument, having a maturity of between one and 10 years.

Short-Term

With reference to a debt instrument, having a maturity of one year or less.

Long-Term

With references to a debt instrument, having a maturity of 10 years or more.

Primary Market

a financial market in which new issues of a security are sold to initial buyers.