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Flashcards in Chapter Two Deck (40):
1

Financial institutions

serve as intermediaries by channeling the savings of individuals, businesses, and governments into loans or investments

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the key suppliers of funds

individuals, businesses, and governments

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net suppliers

individuals; They save more money than they borrow

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net demanders

government and business firms; They borrow more money than they save.

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commercial banks

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

6

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.

7

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.

8

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.

9

Financial markets

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

10

money market

short-term debt instruments;marketable securities

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capital market

long-term securities-bonds and stocks

12

private placement

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

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public offering

the sale of either bonds or stocks to the general public

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primary market

financial market in which securities are initially issued: the only market in which the issuer is directly involved in the transaction

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secondary market

financial market in which preowened securities are traded; original company is not invloved

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the money market

is created by a financial relationship between suppliers and demanders of short-term funds

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capital market

is a market that enables suppliers and demanders of long-term funds to make transactions

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bonds

are long-term debt instruments used by business and government to raise large sums of money

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preferred stock

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

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How securities are traded

through broker markets and dealer markets

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the difference between broker and dealer market

is a technical point dealing with the way trades are executed

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broker market

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

23

securities exchanges

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

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dealer market

the buyer and the seller are never brought directly but instead have their orders executed by securities dealers that "make markets" in the given security

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market makers

securities dealers who "make markets" by offering to buy or sell certain securities at stated prices
-linked together via mass-telecommunications network

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bid price

the highest price offered to purchase a security

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ask price

the lowest price at which a security is offered

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efficient markets

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

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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.

30

international equity market

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

31

securitization

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

32

Federal Deposit Insurance Corporation (FDIC)

which provided deposit insurance, effectively guaranteeing that individuals would not lose their money if they it in a bank that failed

33

Gamm-Leach-Bliley act

which allows commercial banks, investment banks and insurance companies to consolidate and compete for business in a wider range of activities

34

Securities and Exchange Commission (SEC)

The primary government agency responsible for enforcing federal securities laws.

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two types of income

ordinary and capital gains

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ordinary income

income earned through the sale of a firm's goods or service

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marginal tax rate

represents the rate at which the next dollar of income is taxed

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average tax rate

a firm's taxes divided by its taxable income

39

double taxation

which occurs when the already once-taxed earnings of a corporation are distributed as cash dividends to stockholders, who must pay taxes on dividends up to a maximum rate of 15 percent

40

capital gains

the amount by which the sale price of an asset exceeds the asset's purchace price