Week 5 - Financial Markets Flashcards
(22 cards)
finance
the field of economics that studies how people make decisions regarding the allocation of resources over time and the handling of risk
financial system
the group of institutions in the economy that help to match one persons saving with another persons investment
financial markets
institutions through which savers can directly provide funds to borrowers
financial intermediaries
financial institutions through which savers can indirectly provide funds to borrowers
bond
certificate of indebtedness that specifies obligations of the borrower to the holder of the bonds
stock
a claim to partial ownership in a firm and is therefore a claim to the profits that the firm makes
equity financing
the sale of a stock
investment or mutual funds
a vehicle that allows the public to invest in a selection, or portfolio of various types of shares, bonds, or both shares and bonds
price
the last price is the price at which the stock was traded
dividend
profits paid out to shareholders
earnings
the accounting profit
earnings per share
companies total earnings divided by the number of shares of stock outstanding
price earnings ratio
the price of a corporations stock divided by the amount the corporation earned per share over the past year
collateralised debt obligations
asset backed securities which are dependent on the value of the assets that backs them up and the stream of income that flows from these assets
credit default swaps
- a means by which a bond holder can insure against risk of default
present value
the amount of money today that would be needed to produce, using prevailing interest rates, a given future amount of money
future value
the amount of money in the future that an amount of money tpday will yield, given prevailing interest rates
compounding
the accumulation of a sum of money
how can you reduce risk
- buy insurance
- diversify
- accept a lower return on their investments
problems with insurance market
adverse selection - high risk person is more likely to apply for insurance than a low risk person
moral hazard - after people buy insurance, they have less incentive to be careful about their risky behaviour
fundamental analysis
the study of a companies accounting statements and future prospects to determine its value
efficient markets hypothesis
- asset prices reflect all publicly available information about the value of an asset, so all shares are fairly valued
- at the market price, the number of people who think that the stock is overvalued exactly balances the number of people who think its undervalued
