Finance Chapter 2

HPR% =

(Ending Price - Beg Price + Dividends\Beg price )* 100%

Chapter 2 Notes

...

Financial markets are the vehicles through which financial assets are bought and sold. They include money or capital markets and primary orsecondary markets.

...

Investment returns are normally measured using the holding period return concept.

...

Money markets deal in securities with maturities of approximately one year or less, while capital markets deal in securities with maturities greater than one year.

...

Primary markets are those in which new securities are issued

...

The exchange rate is the rate at which one currency can be converted into another.

...

The forward rate is the rate of exchange between currencies to be delivered at a future point in time—usually 30, 90, and 180 days from today.

...

The futures rate is also a rate of exchange between currencies to be delivered at a future point in time. In contrast to forward contracts, futures contracts are standardized with respect to size and delivery date and are traded on organized exchanges, such as the International Monetary Market. Foreign currency options give the option holder the right to buy or sell a foreign currency at a fixed price over some time horizon.

...

The spot rate is the rate of exchange for currencies being bought and sold for immediate delivery today.

...

secondary markets are those in which existing securities are traded.

...

The Eurocurrency market is an important alternative to domestic sources of financing for multinational firms.

LIBOR, the London InterBank Offer Rate, is the basic interest rate against which Eurocurrency loans are priced.

A Eurocurrency is a currency deposited in a bank located outside the country of origin.

The Eurocurrency market is an important alternative to domestic sources of financing for multinational firms. The interest rate charged for Eurocurrency loans is tied to LIBOR, the London InterBank Offer Rate.

Holding period returns measure the

actual or expected return from holding a security, including price changes and distributions, such as dividends or interest.

Long-term securities have maturities of more than one year and are traded in

capital markets.

Financial intermediaries include

commercial banks, thrift institutions, investment companies, and finance companies.

The exchange rate is the rate at which a currency can be

converted into another currency.

In efficient capital markets, security prices represent an unbiased estimate of the true

economic value of the cash flows expected to be generated for the benefit of that security holder.

In the U.S. financial system, funds flow from net savers (such as households) to net investors (such as businesses) through

financial middlemen and financial intermediaries.

Capital markets are considered to be efficient if security prices

instantaneously and fully reflect, in an unbiased way, all economically relevant information about a security's prospective returns and the risk of those returns.

Short-term securities with maturities of one year or less are traded in

money markets.

Financial markets are classified as

money or capital markets and primary or secondary markets.

Financial assets consist of

money, debt securities, and equity securities.

Companies engaged in international financial transactions face such problems as

political and exchange rate risk in addition to those risks encountered in domestic transactions.

The forward rate is the

present exchange rate for deliveries of currencies in the future.

The spot rate is the

present exchange rate for immediate delivery.

New securities are traded in the

primary markets.

Existing securities are traded in the

secondary markets, such as the New York Stock Exchange, the American Stock Exchange, and the over-the-counter market.

Financial middlemen include

securities brokers and investment bankers.

The main purpose of an economy's financial system is to facilitate the transfer of funds from

surplus spending units to deficit spending units. Financial middlemen, such as investment bankers, bring together the surplus and deficit spending units in the capital markets so that funds can be transferred. /Financial intermediaries, such as commercial banks, receive primary claims from their borrowers and issue secondary claimsto their lenders. Secondary claims have different risk and liquidity characteristics than primary claims.