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Flashcards in Chapter 2 Deck (35):
1

capital market

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

2

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

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

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venture capitalist

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

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saving deficit

those who need money

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saving surplus

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

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Indirect transfer using an investment-banking firm

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

7

Indirect transfer using the financial intermediary

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

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direct transfer of funds

firm seeking cash sells directly to investors (savers)

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public offering

individuals and institutional investors have the opportunity to purchase the securities

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private placement

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

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venture capital firm

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

12

primary market

a market in which new securities are traded

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initial public offering IPO

the first time a company issues its stocks to the public

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seasoned equity offering SEO

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

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secondary market

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

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money market

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

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cash markets or spot markets

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

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future markets

where you can buy or sell something at a future date

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organised security exchanges

(building) financial instruments are traded on their premises

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over the counter markets

all security markets except the organised exchanges

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underwriting

assuming a risk

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underwriters spread

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

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private debt placements

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

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advantages with private placements

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

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disadvantages with private placements

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

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opportunity cost of funds

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

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maturity premium

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

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liquidity premium

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

29

real risk-free interest rate

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

30

nominal rate of interest

tells you how much more money you will have

31

term structure of interest rates

the relationship between interest rates and the term to maturity

32

yield to maturity

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

33

the unbiased expectations theory

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

34

the liquidity preference theory

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

35

market segmentation theory

no relationship between long and short term interest rates