Fin 4319-Chapter 1 Flashcards
What are primary markets?Give some examples.
They are markets in which users of funds(corporations) raise funds through new issues of financial instruments, such as stocks and bonds. For example, Morgan Stanley or Bank America Merril Lynch that serve as intermediaries between the issuing corporations(funds users) and investors(funds suppliers).
What are secondary markets? Give some examples.
Once financial instruments such as stocks are issued in primary markets, they are then traded-that is, rebought and resold-in secondary markets. For example, NYSE( New York Stock Exchange) and NASDAQ(Association of Securities Dealers Automated Quotation).
What do secondary markets do?
Secondary markets offer buyers and sellers liquidity-the ability to turn an asset into cash quickly-as well as information about the prices or the value of their investments. Increased liquidity makes it more desirable and easier for the issuing firm to sell a security initially in the primary market.
What is IPOs and derivative meant?
IPOs(The first public offerings): the first public issue of financial instruments by a firm.
Derivative security: A financial security whose payoffs are linked to other, previously issued securities.
What are diffences bewteen money makets and capital markets?
Money markets: are markets that trade debt securities or instruments with maturities of one year or less.
Capital markets: are markets that trade equity(stocks) and debt(bonds) instruments with maturities of more than one year.
Give examples of Money and Capital Market Instruments.
Money Market Instruments: Treasury bills(short-term obligations issued by the U.S government; Federal funds(short-term funds transferred between financial institutions usually for no more than 1 day): repurchase agreements(agreements involving the sale of securities by 1 party to another with a promise by the seller to repurchase the same securities from the buyer at a specified date and price); commercial paper; banker’s acceptance.
Capital market instruments: Corporate stock(the fundamental ownership claim in a public corporation); Mortgages: loans to individuals or businesses to purchase a home, land, or other real property; Corporate bonds(long -term bonds issued by corporations); Treasury bonds; State and local government bonds.
What are foreign exchange markets?
Cash flows from the sale of securities denominated in a foreign currency expose U.S corporations and investors to risk regarding the value at which foreign currency cash flows can be converted into U.S dollars.
What are derivative security markets?
The markets in which derivative securities trade.
What is derivative security?
An agreement between 2 parties to exchange a standard quantity of an asset at a predetermined price on a specified date in the future.
What is financial market regulation?
Financial instruments are subject to regulations imposed by regulatory agencies such as the Securities and Exchange Commision(SEC)-the main regulator of securities markets since the passage of the Securities Act of 1934-as well as the exchanges on which the instruments are traded.
What are financial institutions?
Commercial and savings banks, credit unions, insurance companies, mutual funds perform the essential function of channeling funds from supplier of funds to users of funds.
In general, users of funds issued financial claims(equity and debt securities) to finance the gap between their investment expenditures and their internally generated savings such as retained earnings.
What is direct transfer and indirect transfer?
- Direct transfer: a corporation sells its stock or debt directly to investors without going through a financial institution.
- Indirect transfer: A transfer of funds bewteen suppliers and users of funds through a financial intermediary.
Why are economic functions performed by Financial Institutions?
Because of monitoring cost, liquidity costs, and price risk, the average investor in a world without FIs would likely view direct investment in financial claims and markets as an unattractive proposition and prefer to hold cash.
