Finance: Financial Markets

is a market in which financial assets (securities) such as stocks and bonds can be purchased or sold. Funds are transferred in ________ when one party purchases financial assets previously held by another party.

facilitate the flow of funds and thereby allow financing and investing by households, firms, and government agencies

transfer funds from those who have excess funds to those who need funds.

Many households and businesses with excess funds are willing to supply funds to financial markets because they would be able to
1. Surplus units

Participants in a financial market

Those participants who receive more money than they spend. And they provide their net savings to the financial markets.

Those participants who spend more money than they receive. And they access funds from financial markets so that they can spend more money than they receive.

Many deficit units such as firms and government agencies access funds from financial
markets by issuing _____, which represent a claim on the issuer.

represent debt (also called credit,or borrowed funds) incurred by the issuer

Deficit units that issue the debt securities are _______.

The surplus units that purchase debt securities are ________, and they receive interest on a periodic basis (such as every six months).

________ have a maturity date, at which time the surplus units can redeem the securities in order to receive the principal (face value) from the deficit units that issued them.

________ (also called stocks) represent equity or ownership in the firm.

A key role of ________ is to accommodate corporate finance activity

involves corporate decisions such as how much funding to obtain and what types of securities to issue when financing operations.

serve as the mechanism whereby corporations (acting as deficit units) can obtain funds from investors (acting as surplus units).

Another key role of _______ is accommodating surplus units who want to invest in either debt or equity securities.

involves decisions by investors regarding how to invest their funds.

The ______ offer investors access to a wide variety of investment opportunities, including securities issued by the U.S. Treasury and government agencies as well as securities issued by corporations.

serve as intermediaries within the financial markets. They channel funds from surplus units to deficit units.

facilitate the issuance of new securities

facilitate the trading of existing securities, which allows for a change in the ownership of the securities.

_________ transactions provide funds to the initial issuer of securities

Many types of debt securities have a _________, so that investors who initially purchased them in the primary market do not have to hold them until maturity.

An important characteristic of securities that are traded in secondary markets is
_________ , which is the degree to which securities can easily be liquidated (sold) without a loss of value.

Investors prefer ________ so that they can easily sell the securities whenever they want (without a loss in value).

If a security is _________, investors may not be able to find a willing buyer for it in the secondary market and may have to sell the security at a large discount just to attract a buyer.

_______ are liquid because they are frequently issued by the Treasury, and there are many investors at any point in time who want to invest in them.
1. money market securities,
2. capital market securities, or

Securities can be classified as:

facilitate the sale of short-term debt securities by deficit units to surplus units.

The securities traded in this market are referred to as _______, which are debt securities that have a maturity of one year or less.

These generally have a relatively high degree of liquidity, not only because of their short-term maturity but also because they are desirable to many investors and therefore commonly have an active secondary market.

They tend to have a low expected return but also a low degree of credit (default) risk.
1. Treasury bills (issued by the U.S. Treasury),
2. commercial paper (issued by corporations), and

Common types of money market securities:

________ facilitate the sale of long-term securities by deficit units to surplus units. The securities traded in this market are referred to as capital market securities.

The securities traded in capital markets are referred to as

are commonly issued to finance the purchase of capital assets, such as buildings, equipment, or machinery
1. bonds,
2. mortgages, and

Three common types of capital market securities are:

are long-term debt securities issued by the Treasury, government agencies, and corporations to finance their operations. They provide a return to investors in the form of interest income (coupon payments) every six months.

Since ______ represent debt, they specify the amount and timing of interest and principal payments to investors who purchase them. At maturity, investors holding the debt securities are paid the principal.

______ commonly have maturities of between 10 and 20 years.

________ are perceived to be free from default risk because they are issued by the U.S. Treasury.

_____ are subject to default risk because the issuer could default on its obligation to repay the debt. These bonds must offer a higher expected return than Treasury bonds in order to compensate investors for that default risk.

______ are long-term debt obligations created to finance the purchase of real estate.

_____ are obtained by individuals and families to purchase homes.

______ are offered to some borrowers who do not have sufficient
income to qualify for prime mortgages or who are unable to make a down payment.

______ exhibit a higher risk of default, thus the lenders providing these mortgages charge a higher interest rate (and additional up-front fees) to compensate.

______ are long-term debt obligations created to finance the purchase of commercial property.

Real estate developers rely on ______ so they can build shopping centers, office buildings, or other facilities.

are debt obligations representing claims on a package of mortgages.

________ represent partial ownership in the corporations that issue them.

Stocks are classified as ________ because they have no maturity and therefore serve as a long-term source of funds.

Investors who purchase stocks

Some corporations provide income to their stockholders by distributing a portion of
their quarterly earnings in the form of _____.

As corporations grow and increase in value, the value of their stock increases; investors can then earn a _______ from selling the stock for a higher price than they paid for it.
1. Periodic dividends

Two ways an investor can earn from stocks:

______ are financial contracts whose values are derived from the values of underlying assets (such as debt securities or equity securities).
1. speculation, and

Many derivative securities enable investors to engage in:

Derivative securities allow an investor to speculate on movements in the value of the underlying assets without having to purchase those assets.

Investors who_________ in derivative contracts can achieve higher returns than if they had speculated in the underlying assets, but they are also exposed to higher risk.

Derivative securities can be used in a manner that will generate gains if the value of the underlying assets declines. Consequently, financial institutions and other firms can use derivative securities to adjust the risk of their existing investments in securities.

can be used to reduce a firm's risk

The ______ is measured as the present value of its expected cash flows, discounted at a rate that reflects the uncertainty surrounding the cash flows.

_______ are easier to value because they promise to investors specific payments
(interest and principal) until they mature

In an_______, securities are rationally priced.

______is the application of psychology to make financial decisions.

The ______ the degree of uncertainty, the higher is the risk from investing in that security.

Although firms with publicly traded stock are required to disclose financial information and financial statements, a firm's managers still possess information about its financial condition that is not necessarily available to investors. This situation is referred to as _______.

_______ extended the disclosure requirements to secondary market issues. It also declared illegal a variety of deceptive practices, such as misleading financial statements and trading strategies designed to manipulate the market price.

______ was intended to ensure complete disclosure of relevant financial information on publicly offered securities and to prevent fraudulent practices in selling these securities.

it established the Securities and Exchange Commission (SEC) to oversee the securities markets, and the SEC has implemented additional regulations over time.

_______ do not prevent investors from making poor investment decisions; they seek only to ensure full disclosure of information and thereby protect against fraud.

In response to the financial scandals, the __________ was passed to require that firms provide more complete and accurate financial information. It also imposed restrictions to ensure proper auditing by auditors and proper oversight by the firm's board of directors.

These rules were intended to regain the trust of investors who supply the funds to the financial markets. Through these measures, regulators tried to eliminate or at least reduce the asymmetric information problem.

_______ normally require the exchange of currencies.

The ______ facilitates the exchange of currencies.

Like securities, most currencies have a ________ that
changes in response to supply and demand.

During the credit crisis, the ____________ purchased various types of debt securities. The intervention was intended to ensure more liquidity in the debt securities markets, and therefore encourage investors to purchase debt securities.

Because financial markets are imperfect, securities buyers and sellers do not have full access to information. Individuals with available funds are not normally capable of identifying credit worthy borrowers to whom they could lend those funds. In addition, they do not have the expertise to assess the creditworthiness of potential borrowers. ___________ are needed to resolve the limitations caused by market imperfections.

They accept funds from surplus units and channel the funds to deficit units. Without them, the information and transaction costs of financial market transactions would be excessive.
a. depository

Financial institutions can be classified as:

_________ accept deposits from surplus units and provide credit to deficit units through loans and purchases of securities.

In aggregate,_________ are the most dominant depository institution. They serve surplus units by offering a wide variety of deposit accounts, and they transfer deposited funds to deficit units by providing direct loans or purchasing debt securities.

The ________ facilitates the flow of funds between depository institutions (including banks).

The_______ serves as a regulator of banks.

Like commercial banks, _______ offer deposit accounts to surplus units and then channel these deposits to deficit units. Savings banks are similar to S&Ls except that they have more diversified uses of funds.

________ differ from commercial banks and savings institutions in that they (1) are nonprofit and (2) restrict their business to their members, who share a common bond (such as a common employer or union).

Most_________ obtain funds by issuing securities and then lend the funds to individuals and small businesses.

_______ sell shares to surplus units and use the funds received to purchase a portfolio of securities

_______ concentrate in money market securities

Some securities firms act as a______ , executing securities transactions between two parties.

The_______ for executing a transaction is reflected in the difference (or spread) between the bid quote and the ask quote.

securities firms often act as _____, making a market in specific securities by maintaining an inventory of securities.

The underwriting and advising services are commonly referred to as ______

securities firms that specialize in underwriting and advising services are sometimes referred to as

When securities firms ______ newly issued securities, they may sell the securities for a client at a guaranteed price or may simply sell the securities at the best price they can get for their client.

_______ provide individuals and firms with insurance policies that reduce the financial burden associated with death, illness, and damage to property.

_______ provide an efficient way for individuals to save for their retirement.

Financial institutions such as commercial banks, insurance companies, mutual funds, and pension funds serve the role of investing funds that they have received from surplus units, so they are often referred to as ________ .

______ is defined as the spread of financial problems among financial institutions and across financial markets that could cause a collapse in the financial system.

On October 3, 2008, Congress enacted the _______ (also referred to as the bailout act), which was intended to resolve the liquidity problems of financial institutions and to restore the confidence of the investors who invest in them.

The act directed the Treasury to inject \$700 billion into the financial system, primarily by investing money into the banking system by purchasing the preferred stock of financial institutions.

In 2008, some large securities firms such as Bear Stearns and Lehman Brothers experienced severe financial problems. The ________ rescued Bear Stearns by financing its acquisition by a commercial bank (J.P. Morgan Chase) in order to calm the financial markets.

On July 21, 2010, President Obama signed the _______ , which was intended to prevent some of the problems that caused the credit crisis.

One of the key provisions of the ______ is that mortgage lenders verify the income, job status, and credit history of mortgage applicants before approving mortgage applications. This provision is intended to prevent applicants from receiving mortgages unless they are creditworthy.

In addition, the Financial Reform Act called for the creation of the _______, which is responsible for identifying risks to financial stability in the United States and makes regulatory recommendations that could reduce any risks to the financial system.

Furthermore, the act established the _________ (housed within the Federal Reserve) to regulate specific financial services for consumers, including online banking, checking accounts, credit cards, and student loans. This bureau can set rules to ensure that information regarding endorsements of specific financial products is accurate and to prevent deceptive practices.