Chapter 2 The Financial Market Environment Flashcards Preview

Introduction to Managerial Finance > Chapter 2 The Financial Market Environment > Flashcards

Flashcards in Chapter 2 The Financial Market Environment Deck (40):

financial institution

An intermediary that channels the savings of individuals, businesses, and governments into loans or investments.


commercial banks

Institutions that provide savers with a secure place to invest their funds and that offer loans to individual and business borrowers.


investment banks

Institutions that assist companies in raising capital, advise firms on major transactions such as mergers or financial restructurings, and engage in trading and market making activities.


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.


shadow banking system

A group of institutions that engage in lending activities, much like traditional banks, but do not accept deposits and therefore are not subject to the same regulations as traditional banks.


financial markets

Forums in which suppliers of funds and demanders of funds can transact business directly.


private placement

The sale of a new security directly to an investor or group of investors.


public offering

The sale of either bonds or stocks tot he general public.


primary market

Financial market in which securities are initially issued; in which the issuer is directly involved in the transaction.


secondary market

Financial market in which preowned securities (those that are not new issues) are traded.


money market

A financial relationship created between suppliers and demanders of short-term funds.


marketable securities

Short-term debt instruments, such as U.S. Treasury bills, commercial paper, and negotiable certificates of deposit issued by government, business, and financial institutions, respectively.


Eurocurrency market

International equivalent of the domestic money market.


capital market

A market that enables suppliers and demanders of long-term funds to make transactions.



Long-term debt instrument used by business and government to raise large sums of money, generally from a diverse group of lenders.


preferred stock

A special form of ownership having a fixed periodic dividend that must be paid prior to payment of and dividends to common stockholders


broker market

The securities exchanges on which the two sides of a transaction, the buyer and the seller, are brought together to trade securities.


securities exchanges

Organizations that provide the marketplace in which firms can raise funds through the sale of new securities and purchasers can resell securities.


dealer market

The market 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.


market makers

Securities dealers who "make markets" by offering to buy or sell certain securities at stated prices.


Nasdaq market

An all-electronic trading platform used to execute securities trades.


over-the-counter (OTC) market

Market where smaller, unlisted securities are traded.


bid price

The highest price offered to purchase a security.


ask price

The lowest price at which a security is offered for sale.


Eurobond market

The market in which corporations and governments typically issue bonds denominated in dollars and sell them to investors located outside the United States.


foreign bond

A bond that is issued by a foreign corporation or government and is denominated in the investor's home currency and sold in the investor's home market.


international equity market

A market that allows corporations to sell blocks of shares to investors in a number of different countries simultaneously.


efficient market

A market that establishes correct prices for the securities that firms sell and allocates funds to their most productive uses.



The process of pooling mortgages or other types of loans and then selling claims or securities against that pool in the secondary market.


mortgage-backed securities

Securities that represent claims on the cash flows generated by a pool of mortgages.


Federal Deposit Insurance Corporation (FDIC)

An agency created by the Glass-Steagall Act that provides insurance for deposits at banks and monitors banks to ensure their safety and soundness.


Gramm-Leach-Bliley Act

An act that allows business combinations (that is, 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.


Securities Act of 1933

An act that regulates the sale of securities to the public via the primary market.


Securities Exchange Act of 1934

An act that regulates the trading of securities such as stocks and bonds in the secondary market.


Securities and Exchange Commission (SEC)

The primary government agency responsible for enforcing federal securities laws.


ordinary income

Income earned through the sale of a firm's good or services.


marginal tax rate

The rate at which additional income is taxed


average tax rate

A firm's taxes divided by its taxable income.


double taxation

Situation that occurs when after-tax corporate earnings are distributed as cash dividends to stockholders, who then must pay personal taxes on the dividend amount.


capital gain

The amount by which the sale price of an asset exceeds the asset's purchase price.