Finance ch. 2

Indirect Transfers through a Financial Intermediary

Through a bank; Underwrite the securities

how does investment banks help companies raise capital?

(1) help corporations design securities with features that are currently attractive to investors (2) buy these securities from the corporation (3) resell them to savers

Stocks are traded using a variety of market procedures such as:

(1) physical location exchanges such as NYSE (2) electronic dealer-based markets such as NASDAQ

The dealer market system consists of

(1) the relatively few dealers who hold inventories of these securities and who are said "to make a market" (2) the thousand of brokers who act as agents in bringing the dealers together with investors (3) the computers, terminals and electronic networks that provide a communication link between dealers and brokers

Commercial banks

Bank of America, Citibank, Wells Fargo, are the traditional "department stores of finance" because they serve a variety of savers and borrowers

Money markets

markets for short-term, highly liquid debt securities

primary markets

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

futures markets

the markets in which participants agree today to buy or sell an asset at some future date

ask price

the price at which a dealer is willing to sell the security

When the demand for an initial public offering (IPO) of securities is less than the number of securities issued, the offering is deemed to be

undersubscribed

Credit unions

Are often the cheapest source of funds available to individual borrowers

US Treasury Bills

Backed by the U.S. government, these financial instruments are short-term debt obligations with a maturity of less than one year. They are considered risk-free investments.

publicly owned corporation

A corporation that is owned by a relatively large number of individuals who are not actively involved in the firm's management.

derivative

A financial instrument whose value is derived from the value of an underlying asset

Over-the counter markets (OTC)

A large collection of brokers and dealers connected electronically by telephones and computers, that provides for trading in unlisted securities

Which of the following characteristics accurately describes the stock market?

An active market that determines the price of a firm's shares

corporate bonds

Issued by corporations, these financial instruments fund their long-term financing requirements and have less risk than equity securities.

certificates of deposit

Issued by money-centered financial firms, these short- or medium-term insured debt instruments pay higher interest than a regular savings account. They are low-risk instruments and have low returns.

How are hedge funds similar to mutual funds?

They accept money from savers and use the funds to buy various securities

Physical Asset Markets

Products such as wheat, autos, real estate, computers, and machinery. Also known as "Tangible" or "Real" asset markets

Exchange Traded Funds

Similar to mutual funds. They buy a a portfolio of stocks of a certain type and then sell their own shares to the public

financial intermediaries

Such as a bank, insurance company, or a mutual fund. Create new forms of capital

pension funds

They are established by an employer to facilitate and organize employee retirement funds.

mutual funds

They collect a pool of funds from investors for the purpose of diversifying risk, earning interest or dividends, and/or generating profits from the investments' increased value.

capital markets

The financial markets for stocks and for intermediate- or long-term debt (one year or longer) or corporate stocks

Spot markets

The markets in which assets are bought or sold for "on-the-spot" delivery.

bid price

The price at which a dealer is willing to buy a security

financial services corporations

These financial conglomerates provide a range of services, such as investment banking, commercial banking, and financial advising.

money market mutual fund

These financial instruments are investment pools that buy such short-term debt instruments as Treasury bills (T-bills), certificates of deposit (CDs), and commercial paper. They can be easily liquidated.

Initial Public Offering (IPO)

When a company issues stock or shares to the public for the first time

Hedging

When it purchases a credit default swap that offers protection against the default of one of its borrowers

direct transfers

Without going through any type of financial institutions

closely held corporation

a corporation that is owned by a few individuals who are typically associated with the firm's management

Financial Asset Markets

deal with stocks, bonds, notes, and mortgages

Money Market Instruments

financial instruments that can be traded easily and have a short-term maturity, which means they are highly liquid. Money market instruments, used to meet short-term financing needs, provide short-term investment options.

capital markets trade instruments

have a maturity period of more than one year. They include securities such as preferred stocks, common stocks, corporate bonds, and long-term bank loans.

Dealer markets

includes all facilities that are needed to conduct security transactions not conducted on the physical location exchanges