Chapters 1 and 2

Question 1

bonds

Answer 1

debt securities that promise to make payments periodically for a specific amount of time

Question 2

Banks

Answer 2

financial institutions that accepts deposits and makes loans.

Question 3

central bank

Answer 3

The most important part of the financial system. In the US it is the Fed. The central bank is the government agency that controls monetary policy / money supply.

Question 4

Federal Bank

Answer 4

Central Bank of the US that controls monetary policy and monetary supply

Question 5

e-finance

Answer 5

Delivering financial services electronically

Question 6

financial crisis

Answer 6

major disruptions in financial markets that are characterized by large declines in assets prices and failures of many firms ( both financial and financial)

Question 7

financial innovation

Answer 7

The development of new financial products and services . Could lead to a financial crisis but also lead to new technology and accessibility.

Question 8

Assets

Answer 8

financial claim or piece of property that is subject to ownership

Question 9

common stock

Answer 9

a share of ownership in a cooperation

Question 10

financial intermediaries

Answer 10

institutions that borrow funds from people’s savings and transfer them to make loans to others.
Examples would include banks, insurance companies, mutual funds.

Question 11

financial markets

Answer 11

markets in which funds are transferred from people who have excess available funds to people who have a shortage

Question 12

foreign exchange market

Answer 12

the instrumental in moving funds between countries. A conversion in currencies often take place

Question 13

foreign exchange rate

Answer 13

the rate which the price of one countries currency in terms of the other

Question 14

interest rate

Answer 14

cost of borrowing or the price paid for rental funds

Question 15

monetary policy

Answer 15

management of interest rates and quantity of money

Question 16

money (money supply)

Answer 16

anything that is accepted in payment for goods and services or accepted for repayment of debt.

Question 17

securities

Answer 17

claim on the issuer’s future income or assets

Question 18

adverse selection

Answer 18

problem created by asymmetric information before a transaction occurs . For example, in the financial market, people with bad credit are the ones that actively seek out a loan, which results in them to be the group most likely to be selected.

Question 19

asset transformation

Answer 19

the process of risk sharing where risky asset is transformed into safer assets for investors

Question 20

asymmetric information

Answer 20

When one party does not know enough about the other party to make accurate decisions

Question 21

brokers

Answer 21

agents of investors who match buyers and sellers of securities

Question 22

capital

Answer 22

Wealth, either financial or physical, that is employed to produce more wealth

Question 23

capital market

Answer 23

market which longer-term debt and equity instruments are traded

Question 24

conflict of interests

Answer 24

a type of moral hazard that arises when a person or institution has multiple objects, which results in conflicting of objectives.

Question 25

dealers

Answer 25

link buyers and sellers by buying and selling securities at stated prices

Question 26

diversification

Answer 26

investing in a collection of assets whose return does not always go in the same direction ( don't put all eggs in one basket )

Question 27

dividends

Answer 27

Periodic payments made by equities to shareholders.

Question 28

Eurobond

Answer 28

a bond denominated in a currency other than that of the currency in which it is sold. An example would be a bond denominated in USD but sold in China.

Question 29

Eurocurrencies

Answer 29

foreign currencies deposited in banks outside the home country

Question 30

Eurodollars

Answer 30

USD deposited in foreign banks outside of the US or in foreign branches in of the US bank. ( They are an important source of fund for American banks )

Question 31

exchanges

Answer 31

buyers and sellers of securities meet in one central location to conduct trades

Question 32

financial intermediation

Answer 32

The process of indirect finance whereby financial intermediaries link lender-savers and borrower-spenders

Question 33

financial panic

Answer 33

widespread collapse of financial intermediaries often caused from asymmetric information.

Question 34

foreign bonds

Answer 34

Foreigns bonds are bonds that are sold in a foreign country but denominated in that country's currency.

Question 35

intermediate-term

Answer 35

debt instruments with maturity between 1 and 10 years

Question 36

investment bank

Answer 36

financial institution that assists initial sale of securities in the primary market through underwriting securities.

Question 37

liabilities

Answer 37

debt

Question 38

liquid

Answer 38

easily transferred into cash

Question 39

liquidity services

Answer 39

services that make it easier for customers to conduct transactions. An example of this would be banks providing checking accounts.

Question 40

long-term

Answer 40

10 years or longer

Question 41

maturity

Answer 41

number of years (term) until that instrument’s expiration date

Question 42

money market

Answer 42

financial market in which only short-term debt instruments are traded

Question 43

moral hazard

Answer 43

problem created by asymmetric information after transactions occur ( ex: when one does not be careful with fire after getting a fire/ burning insurance)

Question 44

over-the-counter market

Answer 44

dealers at different locations who have inventory of securities stand ready to buy and sell securities to anyone who comes to them and are willing to accept their prices. These are usually more competitive as they are often done through the computer and know the prices set by one another.

Question 45

portfolio

Answer 45

a collection of assets

Question 46

primary market

Answer 46

financial markets in which new issues of a security are sold to initial buyers by the corporation or government agency borrowing funds

Question 47

risk

Answer 47

uncertainty about the returns investors will earn on assets

Question 48

risk sharing

Answer 48

when financial intermediates create and sell assets with risk characteristics that people are comfortable with, and then use the funds they got to purchase other assets that have lower risk

Question 49

secondary market

Answer 49

securities that have been previously issued can be resold

Question 50

short-term

Answer 50

less than a year

Question 51

thrift institutions

Answer 51

financial institutions that often accept deposits and transform them into loans (often times mortgages). These include credit unions, mutual savings banks, and saving and loan associations

Question 52

transaction costs

Answer 52

time and money spent in carrying out financial transactions

Question 53

underwriting

Answer 53

guaranteeing a price for a corporation's securities and then sells it to the public

Question 54

economies of scale

Answer 54

reduction in transaction costs per dollar of transaction as the size or scale of transaction increases. An example of this would be when a firm hires a lawyer to create a very good airtight contract for loans. This contract could be used over and over again for each loan transaction, thereby lowering the legal cost per transaction.

Question 55

economies of scope

Answer 55

the lowering of cost of information production for each service by applying one information resource to many different services

Question 56

equities

Answer 56

claims to share in the net income and assets of a business