Chapter 2

borrower defaults on the loan or fails to meet the terms.

A Mortgage is a Legal mechanism put in place which allows the lender to take possession and sell the secured property (foreclosure, repossession) to pay off the loan in the event that the _________

asset is collateral

A Mortgage is a loan to household/firms to buy land/asset/real property where the _______

Eurobonds

A US based company goes to Australia to sell its bonds denominated in Canadian $ is an example of _______

eurobond

A ______ is denominated in a currency other than the home currency of the country or market in which it is issued.

Foreign Bonds

A bond issued by a US firm that is denominated in Japanese yen and that is for sale exclusively in japan is an example of _________

firms and investors

A function of FINANCIAL MARKETS is Risk sharing: They share risk between _________

Price Determination

A function of FINANCIAL MARKETS is _______, it sets the price of bonds/stocks

of capital (wealth, physical or financial that is employed to produce more capital) increases production

A function of FINANCIAL MARKETS is the efficient allocation of _______ that _______

have saved surplus funds have a shortage of funds

A function of FINANCIAL MARKETS is to Channel funds from economic players that _________ to those that _______

Liquidity

A function of FINANCIAL MARKETS is to provide ________: how fast you can convert an asset into cash

Asset Transformation

A savings deposit that is held by one person can provide the funds that enable the bank to make a mortgage loan to another person. This is an example of: _______

an asset which Microsoft shows as shareholder equity on its balance sheet.

A share of Microsoft common stock is ______ for its owner

Asymmetric Information

A situation where one party often does not know enough about the other party to make accurate decisions.

before the transaction

Adverse Selection is done _________

Wider

CAPITAL MARKET INSTRUMENTS have ____ price fluctuations

longer term (> 1 year)

Capital markets deal in _________ debt and equity instruments

Depository

Commercial Banks are _______ Institutions

MONEY MARKET

Commercial paper are _______ instruments

imports/exports

Companies use Eurodollars to finance _______

excess cash

Companies use Eurodollars to invest ________

short term

Companies use Eurodollars to make ______ loans

Eurodollars

Companies use _______ to settle international transactions

Mortgage backed

Concerning _______ securities, Interest and the principal amount is collectively paid to the holders of the security

Disclosure of information Restrictions on Assets and Activities (control holding of risky assets). Deposit insurance (avoid bank runs). Limits on Competition (mostly in the past)

Concerning the REGULATION OF THE FINANCIAL SYSTEM, To ensure the soundness of financial intermediaries, there are: 1. 2. 3. 4.

Reduce adverse selection and moral hazard problems Reduce insider trading (SEC)

Concerning the REGULATION OF THE FINANCIAL SYSTEM, To increase the information available to investors: 1. 2.

CAPITAL MARKET INSTRUMENTS

Consumer & Bank commercial loans are _______ instruments

CAPITAL MARKET INSTRUMENTS

Corporate bonds are long term so they are ______ instruments

earn interest on surplus funds that they have for short duration

Corporations and banks use the money market to _______

Depository

Credit Unions are _______ Institutions

cost per $ of transaction falls as the size of the transaction increases

Economies of scale provide lower transaction costs because the ___________

the net income and assets of a business

Equities (eg: common stock) are claims to a share of _________

Long no maturity date

Equities are _______ term securities because they have ______

ownership interest in the issuer

Equities are a security that confers on the holder an _________

A bond denominated in a currency other than that of the country in which it is sold—for example, a bond denominated in US dollars sold in London

Eurobonds are:

outside the home country

Eurocurrencies are foreign currencies deposited in banks _________

Foreign currencies deposited in banks outside the home country

Eurocurrency is:

US dollars deposited in foreign banks outside the United States or in foreign branches of US banks.

Eurodollars are:

bought and sold in a specific location

Exchanges are where securities are _____

economic efficiency

FINANCIAL MARKETS are essential in promoting _________

MONEY MARKET

Federal funds are _______ instruments

overnight loans from one bank to another bank

Federal funds are _________

Investment

Finance Companies are _________ Intermediaries

Risk sharing

Financial intermediaries create & sell assets with risk characteristics people are comfortable with and then when they sell the assets, they use the money to buy riskier assets. This is called _______

economies of scope

Financial intermediaries lower transaction costs by using ________ because they do a lot of different services that use the same info gathered about that company already. They evaluate a firm to check if it's a good credit risk or a bad one for loaning money

Economies of scale Liquidity services

Financial intermediaries lower transaction costs by using ____________

they allow consumers to time their purchases better they channel funds from savers to investors

Financial markets improve economic welfare because: 1. 2.

matching savers with funds to lend to people who want to borrow funds

Financial markets perform the basic function of:

Contractual Savings

Fire and casualty insurance companies are _______ Institutions

the foreign country's currency.

Foreign Bonds are sold in a foreign country and denominated in ________

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

Foreign Bonds are:

Investment

Hedge Funds are _________ Intermediaries

Adverse Selection Moral Hazard

How do financial intermediaries deal with asymmetric information problems? Use _______

Bonds

If you suspect that an airline will go bankrupt next week, which would you rather hold, bonds issued by the company, or equities issued by the company?

Direct movement of funds between firms

In Direct finance there is the ________

Corporate bonds

In a given year, corporations raise the greatest amount of funds through what instruments?

borrowers sell securities

In direct finance what do borrowers do?

Savers buy securities

In direct finance what do savers do?

borrowers take out loans

In indirect finance what do borrowers do?

Savers make deposits

In indirect finance what do savers do?

financial intermediaries

Indirect Financing needs _______ to move funds

they help reduce the exposure of investors to risk.

Individuals may find it efficient to save their funds in a financial intermediary because:

between 1 and 10 years

Intermediate term debt instrument maturity is _________

how tight the credit market is.

It is important to pay attention to federal funds rate. It shows us __________

Contractual Savings

Life insurance Companies are _______ Institutions

checking accounts for easy depositing and withdrawing funds

Liquidity services provide lower transaction costs by using ____________

> 10 years

Long term debt instrument maturity is _______

banks and corporations

MONEY MARKET INSTRUMENTS are mostly held by _______

the least

MONEY MARKET INSTRUMENTS have ______ price fluctuations

short term

MONEY MARKET INSTRUMENTS have a _____ to maturity

Residual claimants: Get fixed payments even if company is doing badly

Main advantage of owning a corporation's bonds rather than its equity?

expiration date

Maturity is a debt instrument's _______

Investment

Money Market Mutual Funds are _________ Intermediaries

short term, < 1 year

Money markets deal in _________ debt instruments

after the transaction

Moral Hazard is done ________

a bundle of individual mortgages.

Mortgage backed securities are instruments that are backed by _________

tradable assets or bonds

Mortgage backed securities are________ like debt

CAPITAL MARKET

Mortgages & Mortgages backed securities are ________ instruments

commercial banks Saving & investment associations mutual savings banks

Mortgages are provided by _________

Investment

Mutual Funds are _________ Intermediaries

Depository

Mutual Savings Banks are _______ Institutions

MONEY MARKET

Negotiable bank certificates of deposit (CD) are _______ instruments

income after all expenses and taxes have been paid (Interest payment on debt, bonds, etc)

Net income is the _________

underwrite a security

Normally In the Primary market, an investment bank will ________

Reduce the exposure of investors to risk

One FUNCTION OF FINANCIAL INTERMEDIARIES is Risk sharing, they __________

aggregation and coordination

One function of FINANCIAL MARKETS is Information _________

not bought and sold at a specific location

Over the counter securities are __________

Contractual Savings

Pension funds, Government retirement funds are _______ Institutions

Uses of funds

Primary Assets are _______

Sources of funds

Primary Liabilities are _______

MONEY MARKET

Repurchase agreements (repos) are _______ instruments

Depository

Savings and loan associates are _______ Institutions

Exchanges and over the counter markets

Secondary markets can be organized in 2 ways:

borrowers/ firms / spenders

Securities are Liabilities for ________

savers/ households/ lenders

Securities are assets for __________

< 1 year

Short term debt instrument maturity is ______

more widely traded

Short term debt instruments are _______ than longer term securities

CAPITAL MARKET INSTRUMENTS

State & local government bonds are ________ instruments

CAPITAL MARKET INSTRUMENTS

Stocks don't expire, don't mature so they are _______ instruments

banks

T-bills can be held by households, corporations, however mainly held by ______

federal funds rate

The Interest rate on federal funds is called the _______

insures deposits

What is the function of the FDIC?

prevents insider trading

What is the function of the SEC?

Residual claimants: get dividend only after all expenses and taxes have been paid off But if the company is doing good you get a higher payment

What is the main advantage of owning equity vs. debt?

A Eurobond

When a bond denominated in dollars is sold in Great Britain, it is known as:

Financial institutions that borrow funds from lenders and savers use them to make loans to borrowers-spenders

Why is there a need for financial intermediaries?

Countries have different regulation laws

Why use Eurodollars?

US Treasury bills

_______ are the most liquid of all money market instruments because they are the most actively traded

Short term

_______ debt instruments are more liquid and they have less price fluctuations

Moral Hazard

_______ is used to ensure borrower will not engage in activities that will prevent him/her to repay the loan. Has to Sign a contract with restrictive agreements

Asymmetric information

_______ means one party doesn't know enough about the other Party, can apply to anything not just financial markets

Corporations and banks

_______ use the money market to earn interest on surplus funds that they have for short duration

Adverse Selection

_______- Occurs when the potential borrowers who are the most likely to produce an undesirable(adverse) Outcome - the bad credit risks - are the ones who most actively seek out a loan and are thus most likely to be selected.

CAPITAL MARKET INSTRUMENTS

________ are Debt & equity instruments with maturity of > 1 year

CAPITAL MARKET INSTRUMENTS

________ are Fairly risky instruments

US Treasury bills

________ have no interest payments, just one payment at end.

MONEY MARKET

________ instruments are the least risky instruments

Adverse Selection

________ is used to try to avoid selecting the risky borrower by gathering information about them

Economies of scale

________ provide lower transaction costs because The cost of production per unit falls when production is on a mass scale

Capital market securities

_________ are held by pension funds & insurance companies

Mortgages

_________ are the Largest debt market in the US

Moral Hazard

_________ is a situation where the borrower might engage in activities that are undesirable from the lender's point of view, because they make it less likely that the loan will be paid back.

Asset Transformation

_________ is when banks make a profit by selling liabilities with one set characteristics and use the proceeds to buy assets with a different set of characteristics. Banks make long term loans and funds them by issuing short term deposits

Facilitating sale of newly issued assets

A Financial market enables borrowing and lending by _________

previously issued assets

A Financial market enables the exchange of ________

financial assets are traded

A Financial market is a Market where ________

denominated in US dollars.

A Eurobond is a bond denominated in a currency other than that of the country in which it is _________

lowering the cost of information production for one service and applying it to different services.

Banks achieve economies of scope by ________

federal fund market

Banks borrow in the _________ if they cannot meet the required reserves and need more funds

Eurobond

Bonds sold by the US government to japan that are denominated in US dollars are __________

match buyers of securities with sellers

Brokers are agents of investors who _______

buying and selling securities at stated prices

Dealers link buyers and sellers by _________

fixed dollar amounts (interest) and the principal amount at instrument's maturity,

Debt is a contractual agreement to pay the holder of the instrument ___________, Regardless of the success or failure of any investment projects for which the borrowed funds are used. e.g.- bonds or mortgage

periodic payments to the shareholders

Dividends are _________

CAPITAL MARKET INSTRUMENTS

US government agency securities are ________ instruments

Secondary markets

The NYSE (New York stock exchange), NASDAQ future markets, and foreign exchange markets are examples of _________

resale of previously issued stocks

The NYSE is a Financial market that handles the _______

new issues of a bond or stock are sold to Initial buyers, first time sold

The Primary market is where _______

previously dealt with can be resold

The Secondary market is where securities _________

buy and sell previously issued US Government Bonds

The US Government bond market is a Financial market where people can _______

sale of newly issued US treasury bills (T-Bills)

The US Treasury auction is a Financial market where there is the _________

Money Market

The ______ is A financial market in which only short-term debt instruments (generally those with original maturity of less than one year) are traded.

Secondary Market

The ______ is A financial market in which securities that have been previously issued can be resold.

Debt Market

The ______ is A market where bonds or mortgages, which are contractual agreements by the borrower to pay the holder of the instrument fixed dollar amounts at regular intervals until a specified date when a final payment is made, are traded.

Capital Market

The _______ is A market in which longer-term debt (generally those with original maturity of one year or greater) and equity instruments are traded.

Eurodollar market

The _______ is one of the world's primary international capital markets.

Primary Market

The _________ is A financial market in which new issues of a security, such as a bond or a stock, are sold to initial buyers by the corporation or government agency borrowing the funds.

Federal Deposit Insurance Corporation

The agency that was created to protect depositors in reaction to the many banking failures of 1930-1933 is the:

Debt and Equities

There are Two types of securities / financial instruments:

costs you incur when entering into a transaction

Transaction costs are ________

time and money

Transaction costs cost ________

Eurodollars

U.S. dollar denominated deposits in foreign banks outside the U.S. or in foreign branches of U.S. banks are ________

CAPITAL MARKET INSTRUMENTS

US Government securities are ________ instruments

buying it cheaper than the set amount

US Treasury bills Interest is effectively paid by ________ at maturity

1, 3 or 6 month maturities

US Treasury bills are Sold at _______ to finance the federal government debt

Short

US Treasury bills are ______ term debt instruments of the US government

MONEY MARKET

US Treasury bills are _______ instruments

Foreign Bonds

US based company issues bonds in Australia denominated in Australian dollars is an example of ______

Eurodollars

US dollars moved by wells fargo to a bank in london are ________