Chapter 2

Question 1

capital market

Answer 1

all the financial institutions that help a business raise long-term capital

Question 2

3 ways that savings can be transferred through the financial markets to those in needs of funds

Answer 2

1. Direct transfer of funds
2. Indirect transfer using the investment banker
3. Indirect transfer using the financial intermediary

Question 3

venture capitalist

Answer 3

an investment firm (or individual) that provides money to business start ups

Question 4

saving deficit

Answer 4

those who need money

Question 5

saving surplus

Answer 5

those who have money (spend less than they take in)

Question 6

Indirect transfer using an investment-banking firm

Answer 6

investment banker frequently works together with other investment bankers in what is called a syndicate, the syndicate will buy the entire issues of securities from the firm and then sell them to the public for a higher place

Question 7

Indirect transfer using the financial intermediary

Answer 7

the financial intermediary collects the savings of individuals and issues its own securities in exchange for these savings, then uses the funds collected from the savers to get the businesses securities

Question 8

direct transfer of funds

Answer 8

firm seeking cash sells directly to investors (savers)

Question 9

public offering

Answer 9

individuals and institutional investors have the opportunity to purchase the securities

Question 10

private placement

Answer 10

securities are offered and sold directly to a limited number of investors

Question 11

venture capital firm

Answer 11

first raises money from institutional investors and high net worth individuals, to pool the funds and invest in startups and early stage companies that have a high return potential but are also very risky

Question 12

primary market

Answer 12

a market in which new securities are traded

Question 13

initial public offering IPO

Answer 13

the first time a company issues its stocks to the public

Question 14

seasoned equity offering SEO

Answer 14

the sale of additional stock by a company whose shares are already publicly traded

Question 15

secondary market

Answer 15

where currently outstanding securities are traded (everything after initial purchase in primary market is in the secondary market)

Question 16

money market

Answer 16

borrowing and lending in the short term (days to under a year); telephone or computer market

Question 17

cash markets or spot markets

Answer 17

where come thing sells today, right now, on the spot

Question 18

future markets

Answer 18

where you can buy or sell something at a future date

Question 19

organised security exchanges

Answer 19

(building) financial instruments are traded on their premises

Question 20

over the counter markets

Answer 20

all security markets except the organised exchanges

Question 21

underwriting

Answer 21

assuming a risk

Question 22

underwriters spread

Answer 22

difference between the price the corporation gets and the public offering price

Question 23

private debt placements

Answer 23

the sale of securities to a relatively small number of select investors as a way of raising capital

Question 24

advantages with private placements

Answer 24

1. Speed - funds come faster
2. reduced costs
3. financing flexibility - may borrow as needed and pay interest only on amount borrowed

Question 25

disadvantages with private placements

Answer 25

1. interest costs: normally exceed those of public issues 2. restrictive covenants (agreements) 3. the possibility of future SEC registration

Question 26

opportunity cost of funds

Answer 26

the next best rate of return available to the investor for a given level of risk

Question 27

maturity premium

Answer 27

the additional return required by investors in longer-term securities to compensate them for the greater risk of price fluctuations on those securities caused by interest rate changes

Question 28

liquidity premium

Answer 28

the additional return required by investors in securities that cannot be quickly converted into cash

Question 29

real risk-free interest rate

Answer 29

the required rate of return on a fixed income security that has no risk

Question 30

nominal rate of interest

Answer 30

tells you how much more money you will have

Question 31

term structure of interest rates

Answer 31

the relationship between interest rates and the term to maturity

Question 32

yield to maturity

Answer 32

the rate of return a bondholder will receive if the bond is held to maturity

Question 33

the unbiased expectations theory

Answer 33

the shaped of term structure of interest rates is determined by an investors expectations about future interest rates

Question 34

the liquidity preference theory

Answer 34

the shape of the term structure of interest rates is determined by an investors additional required interest rate in compensation of additional risks

Question 35

market segmentation theory

Answer 35

no relationship between long and short term interest rates