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Flashcards in Fin 4319-Lecture 3 Deck (33):

What is asset transformer?



What's on the balance sheet of financial intermediary?

Assets have primary claims
Liabilities have secondary claims


What are life insurance policies on the balance sheet?

Life insurance policies are liabilities, assets are stocks and bonds. When insurance companies take the customer money they would invest in bonds until they need to pay the customer's death.


What about mutual funds?

Liabilities Fund shares are direct claims on a portfolio. Assets include stocks and bonds. Issue financial claims to purchase other financial claims.


If you open a brokerage fund and buy stocks, is that direct or indirect?

Direct. Those are your claims on the security


What if you take your money and buy a mutual fund form broker?

Indirect. You have a financial claim on a fund which invests in stocks/bonds.


What are the services provided Financial Intermediaries?

1. Denomination divisibility. Some assets have a huge minimum ($100k or 5 million, etc.), and the FI will allow you to invest in smaller amounts of money. They pool a bunch of savers to make large loans/investments.


What is liquidity intermediation (risk)?

If everyone took their money out of the bank at the same time, the bank doesn't have the money, it's been loaned out to DSU.


What is maturity intermediation (risk)?

If interest rates go up, and the bank loan interest rates are above the savings interest rate, it's risky.


What are economies of scale of information?

FI have more information than SSU's. It's not cost effective for every SSU to research and know about financial markets to loan money to DSU's.


What are economies of scale of transaction costs?

A long time ago transaction costs to trade used to be high, but they aren't anymore. Back then it used to cost a lot to trade and it was more cost effective to have brokers buy mutual funds.


What advantages do individual investors have over institutional investors?

Individuals have to pay commission, bid-ask spread to dealer but they don't have to pay price concessions. Institutions trade in huge quantities so they move the price so they have to trade slowly.


What services do Mutual funds provide?

mutual funds provide Diversification of stocks and bonds
mutual funds provide Record keeping of transactions so you don't have do taxes for the trades.


What services do get from insurance provide?

Risk management. Insurance protects you from untimely death or sickness, if you die too early, your family may be in trouble.


What is disintermediation?

When people stop using financial intermediaries and do direct lending. Interest rates used to be high in the 1980's like 15% so CD's were very popular, but since interest rates are so low now they are no longer being used.


What is information float?

The time it takes for information to travel around the world. Information float is very fast now.


What is the money market as opposed to capital markets?

Money market is short term financing. It's also low risk.


What is capital for finance?

Corporate stock, treasury bonds.


What is money market?

It's the market for the most liquid financial assets. It has to be cash equivalents.


What is liquidity?

Liquidity - ability to convert to cash quickly at a minimal risk loss.


What is the hierarchy of claims for bankruptcy?

1. Current creditors (commercial paper, taxes, wages, bank loans) (bankruptcy lawyers)
2. Bond Holders (Senior debt, junior debt)
3. Preferred stockholders
4. Common stockholders (residual claimant or owner)


What usually happens in bankruptcy?

Usually bankruptcy results in reorganization instead of liquidation.
The junior debtors get common stock in the reorganized company.


What are characteristics of cash equivalents?

1. the issuer has minimal default risk
2. minimal trading costs
3. minimal price risk (maturity < 1 year)


What are in capital markets?

1. Bonds
US Treasuries, Notes
Corp Bonds
Municipal bonds
2. Equities
Preferred Stock
Common Stock
3. Hybrids
Convertible bond
Convertible preferred stock
4. Mortgages


What is working capital?

Short term financing


What are Asset backed securities?



What are mortgage backed securities?

Take a pool of mortgages and sell shares of them
Insurance companies and other FI's would invest in these MBS. It's paper so it's easily traded.


What are the derivatives of MBS?

Collaterized mortgage obligation.


What is securitization?

It's a big trend.


What are derivatives?



What is the flow of savings for individuals?

Savings = Real Asset + Financial Asset - Financial Liability


What is the most important investment?

Human Capital
The house and car are consumption


What is the flow of savings for entire economy (aggregate)?

see notes