Chapter 2
Risk in Mortgage-backed securities
A primary risk associated with mortgage-back securities is that homeowners may not be able to, or may choose not to, repay their loans.
Tax-Deductible Expenses
In calculating taxes, corporations may deduct operating expenses and interest expense but not dividends paid.
Largest stock market in the world?
NYSE Euronext
Long term securities
Take place in the Capital Market
Short term marketable securities
Take place in the money market
How are firms intermediares?
They channel the savings of individuals, businesses, and governments into loans or investments.
Foreign bond market
a market for bonds issued by a foreign corporation or government that is denominated in the investor's home currency and sold in the investor's home market
Capital market
a market that enables suppliers and demanders of long-term funds to make transactions
Efficient market
allocates funds to their most productive uses as a result of competition among wealth-maximizing investors and determines and publicizes prices that are believed to be close to their true value.
Gramm-Leach-Bliley Act
allows business combinations (e.g. mergers) between commercial banks, investment banks, and insurance companies, and thus permits these institutions to compete in markets that prior regulations prohibited them from entering
International equity market
allows corporations to sell blocks of shares to investors in a number of different countries simultaneously
Glass-Steagall Act
an act of Congress in 1933 that created the federal deposit insurance program and separated the activities of commercial and investment banks. It was repealed it 1999 by Congress
Behavioral finance
an emerging field that blends ideas from finance and psychology, argue that stock prices and prices of other securities can deviate from their true values for extended periods.
Investment Banks
are institutions that: assist companies in raising capital advise firms on major transactions such as mergers or financial restructurings engage in trading and market making activities
Commerical Banks
are institutions that: provide savers with a secure place to invest their funds offer loans to individual and business borrowers
key capital market securities
bonds (long-term debts) and common and preferred stocks (equity, or ownership)
Eurobond market
corporations and governments typically issue bonds denominated in dollars and sell them to investors located outside the United States
Money market
created by a financial relationship between suppliers and demanders of short-term funds
Shadow banking system
describes a group of institutions that: engage in lending activities, much like traditional banks but do not accept deposits are not subject to the same regulations as traditional banks
ordinary income
earned through the sale of good or services (includes interest received)
Secondary market
financial markets in which preowned securities (those that are not new issues) are traded
Financial markets
forums in which suppliers of funds and demanders of funds can transact business directly.
Private placement
involves the sale of a new security directly to an investor or group of investors
Bonds
long-term debt instruments used by businesses and gov. to raise large sums of money
Double taxation
occurs when after-tax corporate earnings are distributed as cash dividends to stockholders, who then must pay personal taxes on the dividend amount
Securitization
process of pooling mortgages or other types of loans and then selling claims or securities against that pool in a secondary market
Glass-Steagall Act 1933
prohibited institutions that took deposits from engaging in activities such as securities underwriting and trading, thereby effectively separating commercial banks from investment banks.
Federal Deposit Insurance Corporation (FDIC)
provides insurance for deposits at banks and monitors banks to ensure their safety and soundness.
Securities Act of 1933
regulates the sale of securities to the public via the primary market.
Securities Act of 1934
regulates the trading of securities such as stocks and bonds in the secondary market
Mortgage-backed securities
represent claims on the cash flows generated by a pool of mortgages and can be purchased by individual investors, pension funds, mutual funds, or virtually any other investor
Broker markets
securities exchanges on which the two sides of a transaction, the buyer and seller, are brought together to trade securities
Marketable securities
short-term debt instruments, such as: U.S. Treasury bills issues by the federal government commercial paper issued by businesses negotiable certificates of deposit issued by financial institutions (least risky investments)
Preferred stock
special form of ownership w features of bond and common stock
Dealer markets
such as Nasdaq, are markets in which the buyer and seller are not brought together directly but instead have their orders executed by securities dealers that "make markets" in the given security
Capital gain
the amount by which the sale price of an asset exceeds the asset's purchase price
Primary market
the financial market in which securities are initially issued; the only market in which the issuer is directly involved in the transaction
Average tax rate
the firm's taxes divided by taxable income.
Eurocurrency market
the international equivalent of the domestic (U.S.) money market
Marginal tax rate
the rate at which additional income is taxed.
How Can firms obtain funds?
through a financial institution through financial markets through private placements
Role of capital markets (firm)
to be a liquid market where firms can interact with investors in order to obtain valuable external financing resources
Role of capital markets (investor)
to be an efficient market that allocates funds to their most productive uses
Common stock
units of ownership interest or equity in a corporation
Public offering
which is the sale of either bonds or stocks to the general public.