Chapter 2: Overview of the Financial System
Mutual Savings Banks and Credit Unions issue deposits as ___________(s) and are owned collectively by their depositors, most of which at credit unions belong to a particular group, e.g., A company's workers
Share
What is/are denominated in one currency, but sold in a different market; Now larger that U.S. corporate bond market; Over 80% of new bonds?
Eurobonds
The following describes what? 1. Foreign currency deposited outside of a home country. 2. Eurodollars are U.S. dollars deposited. 3. Gives U.S. borrowers an alternative source for dollars.
Eurocurrency Market
Trades conducted in central locations (e.g., NYSE, CBT) are called what?
Exchanges
What is the index of the 100 most highly capitalized UK companies listed on the London Stock Exchange called?
FTSE 100
Which type of Financial Intermediary's primary assets (uses of funds) are: 1. corporate bonds 2. mortgages Hint: Contractual Savings Institution
Life insurance companies
A Financial Intermediary's low transaction costs mean that it can provide its customers with what?
Liquidity Services
The following is an example of what? Banks provide depositors with checking accounts that enable them to pay their bills easily.
Liquidity Services
The following is an example of what? Depositors can earn interest on checking and saving accounts and yet still convert them into goods and services whenever necessary.
Liquidity Services
What are services that make it easier for customers to conduct transactions called?
Liquidity Services
Markets can also be classified by the ___________of the securities
Maturity
The maturity of securities in a(n)______________are Short-Term (Maturity < Year).
Money Market
Which Financial Intermediary acquires funds by selling checkable deposit-like shares to individual investors and use the proceeds to purchase highly liquid and safe short-term money market instruments?
Money Market Mutual Funds
Which type of Investment Intermediary's Primary Assets (uses of funds) are: 1. Money Market Instruments
Money Market Mutual Funds
The following describes which front of Asymmetric Information? 1. After transaction occurs 2. Hazard that borrower has incentives to engage in undesirable (immoral) activities making it more likely that they won't pay back the loan. 3. With insurance, people may engage in risky activities only after being insured 4. Another view is a conflict of interest.
Moral Hazard
Which Financial Intermediary acquires funds by selling shares to individual investors (may of whose shares are held in retirement accounts) and uses the proceeds to purchase large, diversified portfolios of stocks and bonds?
Mutual Funds
Which type of Investment Intermediary's Primary Assets (uses of funds) are: 1. Stocks 2. Bonds
Mutual Funds
Which investment Intermediary's Primary liabilities (sources of funds) are: 1. Shares
Mutual Funds; Money Market Mutual Funds
What is the index for all the stocks that trade on the Nasdaq stock market, where most of the technology stocks in the United States are traded, called?
Nasdaq Composite
Which Regulatory Agency charters and examines the books of federally chartered credit unions and imposes restrictions on assets they can hold?
National Credit Union Administration (NCUA)
Which Regulatory Agency regulates federally chartered credit unions?
National Credit Union Administration (NCUA)
Which Regulatory Agency charters and examines the books of federally chartered commercial banks and thrift institution and imposes restrictions on assets they can hold?
Office of the Comptroller of the Currency
Which Regulatory Agency regulates federally chartered commercial banks and thrift institutions?
Office of the Comptroller of the Currency
Trades conducted by Dealers at different locations buying and selling (e.g., the Treasury Securities market) are called what?
Over the Counter Markets
S&Ls, Mutual Savings Banks, and Credit Unions are also known as what?
Thrifts
Which Depository Institutions raise funds primarily by issuing savings, time, and checkable deposits which are most often used to make mortgage and consumer loans, with commercial loans also becoming more prevalent at S&Ls and Mutual Savings banks.
Thrifts
Financial Intermediaries make profits by reducing what?
Transaction Costs
Financial Intermediaries reduce _______________ by developing expertise and taking advantage of economies of scale.
Transaction Costs
Which Regulatory Agency regulates organized exchanges and financial markets, requiring disclosure of information and restricts insider trading?
Securities and Exchange Commission (SEC)
Financial Intermediation is a more important source of finance than _____________ such as stocks
Securities markets
Direct and Indirect Finance are what?
Segments of Financial Markets
The following describes which front of Asymmetric Information? 1. Before transaction occurs 2. Potential borrowers most likely to produce adverse outcome are ones most likely to seek a loan. 3. Similar problems occur with insurance where unhealthy people want their known medical problems covered.
Adverse Selection
What process turns risky assets into safer assets for investors?
Asset Transformation
When FIs create and sell assets with lesser risk to one party in order to buy assets with greater risk from another party it is known as what?
Asset Transformation
One reason FIs exists is to reduce the impact of what?
Asymmetric Information
When one party lacks crucial information about another party, it can impact their decision making. This is known as what?
Asymmetric Information
Which problem is usually discussed along two fronts: Adverse Selection and Moral Hazard?
Asymmetric Information
The following describes what? 1. Business firms 2. Government 3. Households 4. Foreigners
Borrower-Spenders
The maturity of Securities in a(n)_____________ are Long-Term (maturity > 1 Year) plus equities (no maturity).
Capital Market
Firms in the U.S., Canada, the U.K., and other developed nations usually obtain funds from financial intermediaries, not directly from____________.
Capital Markets
The following are some of the reasons for the Relative Decline of U.S.____________: 1. new technology in foreign exchanges 2. 9-11 made U.S. regulations tighter 3. Greater risk of lawsuit in the U.S. 4. Sarbanes-Oxley has increased the cost of being a U.S. listed public company.
Capital Markets
The primary Assets (Uses of Funds) of a(n)________________ are: 1. Business and consumer loans 2. mortgages 3. U.S. government 4. Municipal Bonds
Commercial Bank
Which Depository Institutions comprise the largest financial intermediary and have the most diversified asset portfolios?
Commercial Bank
Which Depository Institutions raise funds primarily by issuing checkable, savings, and time deposits which are used to make commercial, consumer and mortgage loans?
Commercial Bank
Which Regulatory Agency regulates Futures market exchanges?
Commodities Futures Trading Commission (CFTC)
An FIs ability to provide multiple services may lead to____________, perhaps causing one area of the FI to hide or conceal information from another area (or the economy as a whole).
Conflicts of Interest
Financial markets improve the well being of ___________(s), allowing them to time their purchases better.
Consumer
All_____________s acquire funds from clients at periodic intervals on a contractual basis and have fairly predictable future payout requirements.
Contractual Savings Institution (CSI)
Life insurance companies, Fire and Casualty Insurance Companies, and Pension and government retirement funds are all types of which Financial Intermediary?
Contractual Savings Institution (CSI)
The primary Assets (Uses of Funds) of a(n)________________ are: 1. Consumer loans
Credit Unions
What is the index of the 30 largest German companies traded on the Frankfurt Stock Exchange called?
DAX
The following describes what? 1. Short-Term (maturity < 1 Years) 2. Long-Term (Maturity >10 Years) 3. Intermediate Term (Maturity in Between) 4. Represented $38.2 Trillion at the end of 2012
Debt Markets
The following fall under which type of Financial Intermediary? 1. Commercial Banks 2. Savings and Loan Associations 3. Mutual Savings Bank 4. Credit Unions
Depository Institution
Which financial Intermediary accepts deposits and makes loans?
Depository Institutions (Banks)
Depository Institutions' (banks) Primary Liabilities (Sources of Funds) are what?
Deposits
When borrowers borrow directly from Lenders in financial markets by SELLING financial instruments which are claims on the borrower's future income or assets it is called what?
Direct Finance
What is the index of the 30 largest publicly traded corporations in the United States called?
Dow Jones Industrial Average (DJIA)
The ability for an FI to lower the production cost of information by using the information for multiple services: bank accounts, loans, auto insurance, retirement saving, etc., is called what?
Economies of Scope
Financial markets are critical for producing a(n)______________, allowing funds to move from people who lack productive investment opportunities to people who have them
Efficient Allocation of Capital
The following describes what? 1. Pay dividends, in theory forever 2. Represents an ownership claim in the firm 3. Total value of all U.S. equity was $18.7 trillion at the end of 2012
Equity Markets
Which Regulatory Agency provides insurance of up to $250,000 for each depositor at a bank; examines the books of insured banks; and imposes restrictions on assets they can hold?
Federal Deposit Insurance Corporation (FDIC)
Which Regulatory Agency regulates commercial banks, mutual savings banks, savings and loan associations?
Federal Deposit Insurance Corporation (FDIC)
Which investment Intermediary's Primary liabilities (sources of funds) are: 1. Commercial Paper 2. Stocks 3. Bonds
Finance Companies
Which type of Investment Intermediary's Primary Assets (uses of funds) are: 1. Consumer and business loans
Finance companies
Which Financial Intermediary sells commercial paper (a short term debt instrument) and issues bonds and stocks to raise funds to lend to consumers to buy durable goods, and to small businesses for operations?
Financial Companies
A(n)_____________ provide the means for individuals and businesses to Diversify their asset holdings.
Financial Intermediary
In Germany and Japan, financing from _________(s) exceeds capital market financing by 10 Fold
Financial Intermediary
Instead of savers lending/investing directly with borrowers, a(n)_______________(such as a bank) plays as the middleman.
Financial Intermediary
The following describes what? 1. Plays as the middleman 2. Obtains funds from savers 3. then makes loans/investments with borrowers
Financial Intermediary
_____________(s) reduce adverse selection and moral hazard problems, enabling them to make profits.
Financial Intermediary
The process of _____________ is actually the primary means of moving funds from lenders to borrowers.
Financial Intermediation
What is needed because of transactions costs, risk sharing, and asymmetric information?
Financial Intermediation
The following describes the function of what? 1. Channels funds from person or business without investment opportunities (i.e., Lender-Savers) to one who has them (Borrower-Spenders). 2. Improves economic efficiency
Financial Markets
Which Contractual Savings Institution receives funds from policy premiums, must invest most in liquid government and corporate securities, since loss events are harder to predict.
Fire and Casualty Insurance Companies
Which type of Financial Intermediary's primary assets (uses of funds) are: 1. Municipal bonds 2. Corporate bonds and stock 3. U.S. government securities Hint: Contractual Savings Institution
Fire and Casualty Insurance Companies
What is/are denominated in a foreign currency and is/are targeted at a foreign market?
Foreign Bonds
According to the book, the following are the most important what? 1. Dow Jones Industrial Average (DJIA) 2. S&P 500 3. Nasdaq Composite 4. FTSE 100 5. DAX 6. CAC 40 7. Hang Seng 8. Strait Times
Foreign Stock Market Indexes
What is the index of the largest companies traded on the Hong Kong stock markets called?
Hang Seng
When Borrowers borrow INDIRECTLY from lenders via FINANCIAL INTERMEDIARIES (established to source both loanable funds and loan opportunities) by issuing financial instruments which are claims on the borrower's future income or assets it is called what?
Indirect Finance
Which Financial Intermediary advises companies on securities to issue, underwriting security offerings, offer M&A assistance, and act as dealers in security markets?
Investment Banks
Finance Companies, Mutual Funds, Money Market Mutual Funds, and Investment Banks are all considered to be which type of Financial Intermediary?
Investment Intermediaries
The following describes what? 1. Households 2. Business firms 3. Government 4. Foreigners
Lender-Savers
Which Contractual Savings Institution receives funds from policy premiums, can invest in less liquid corporate securities and mortgages, since actual benefit pay outs are close to those predicted by actuarial analysis.
Life Insurance Companies
Which Contractual Savings Institution(s) Primary Liabilities (sources of funds) are Premiums from policies?
Life Insurance Companies; Fire and Casualty Insurance Companies
Which Contractual Savings Institution 1. are hosted by corporations and state and local governments 2. acquire funds through employee and employer payroll contributions, invest corporate securities, 3. and provide retirement income via annuities.
Pension and Government Retirement Funds
Which type of Financial Intermediary's primary assets (uses of funds) are: 1. Corporate bonds 2. Stocks Hint: Contractual Savings Institution
Pension funds, government retirement funds.
Which Contractual Savings Institution(s) Primary Liabilities (sources of funds) are Employer and employee contributions?
Pension funds; government retirement funds
The following describes what? 1. New security issues sold to initial buyers 2. Typically involves an investment bank who underwrites the offering
Primary Market
A benefit made possible by the FI's (Financial Intermediary) low transaction costs is that they can help reduce the exposure of investors to risk, through a process known as ___________.
Risk Sharing
What is the index of 500 of the largest companies traded in the United States, maintained by Standard & Poor's, called?
S&P 500
The primary Assets (Uses of Funds) of a(n)________________ are: 1. Mortgages
Savings and Loan Associations; Mutual Savings banks
Firms don't get any money from the _____________.
Secondary Market
The NYSE and Nasdaq are examples of what?
Secondary Market
The following describes what? 1. Securities previously issued are bought and sold 2. Involves both brokers and dealers.
Secondary Market
What can be further classified into Exchanges and Over the counter markets?
Secondary Market
What provides liquidity, making it easy to buy and sell the securities of the companies and Establishes a price for the securities (useful for company valuation)?
Secondary Market
Which Regulatory Agency charters and examines the books of State-Chartered banks and insurance companies; imposes restrictions on assets they can hold; and imposes restrictions on branching?
State Banking and Insurance Commissions
Which Regulatory Agency regulates State-chartered depository institutions?
State Banking and Insurance Commissions
What is the index of the largest 30 companies traded on the Singapore Exchange called?
Strait Times
Who has lost their dominance in many industries including automobiles and consumer electronics.
United States