Chapter 20 Flashcards
Financial systems
The set of institutions through which the resources of those who want to save are allocated to those who want to borrow.
Financial markets
Markets through which savers can directly provide resources to borrowers, such as the stock market and the bond market.
Bond
A document instrument representing an interest-bearing debt of the issuer, usually a corporation or the government.
Stock
- A variable measured as a quantity at a point in time. 2. Shares of ownership in a corporation.
Debt finance
Obtaining funds for a business by borrowing, such as through the bond market.
Equity finance
Obtaining funds for a business by issuing ownership shares, such as through the stock market.
Financial intermediaries
Institutions that facilitate the matching of savers and borrowers, such as banks.
Risk averse
A dislike of uncertainty.
Diversification
Reduction of risk by holding assets with imperfectly correlated returns.
Mutual funds
Financial intermediaries that hold a diversified portfolio of stocks or bonds.
Asymmetric information
A situation in which one party in an economic transaction has some relevant information not available to the other party.
Adverse selection
An unfavorable sorting of individuals by their own choices; for example, in efficiency-wage theory, when a wage cut induces good workers to quit and bad workers to to remain with the firm.
Moral hazard
The possibility of dishonest or other inappropriate behavior in situations in which behavior is imperfectly monitored; for example, in efficiency-wage theory, the possibility that low-wage workers may shirk their responsibilities and risk getting caught and fired.
Financial crisis
A major disruption in the financial system that impedes the economy’s ability to intermediate between those who want to save and those who want to borrow and invest.
Speculative bubble
A rise in the price of an asset above its fundamental value.
