FIN Ch. 2
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When actual savings = actual investments.
Saving investment cycle depends on what 2 parties? (NN)
- 1. Net savers (surplus spending units)
- 2. Net investors (deficit spending units)
Net savers are aka...
surplus spending units.
investors are aka...
deficit spending units.
The saving-investment cycle is completed when...
the net savers transfer funds to the net investors.
The main purpose of the US financial system is to...
facilitate the transfer of funds in the saving-investment cycle.
3 types of financial middlemen. (BDI)
- 1. Brokers
- 2. Dealers
- 3. Investment bankers
What do brokers do?
Bring together buyers and sellers of securities.
What do dealers do?
Sell securities to investors out of an inventory they carry.
What do investment bankers do?
Help corporations sell their securities.
Securities that are sold directly by the borrower and bought directly by the saver.
6 types of financial intermediaries. (CTIPIF)
- 1. Commercial banks
- 2. Thrift institutions
- 3. Investment companies
- 4. Pension funds
- 5. Insurance companies
- 6. Finance companies
Middlemen issue... and intermediaries issue...
primary claims, secondary claims.
Intermediaries are compensated by...
an interest rate spread.
Debt and equity securities represent...
claims against the assets and future earnings of the corporation.
Markets that deal in short-term securities having maturities of one year or less.
Markets that deal in long-term securities having maturities greater than one year.
Early-stage companies usually enter...
Large corporations usually enter...
Any investor who purchases new securities is participating in a...
Any investor who resells existing securities is participating in a...
2 types of deposits that commercial bankjs accept. (DT)
- 1. Demand deposits
- 2. Time deposits
Commercial banks are an important source of... and... (ST)
short-term loans, term loans
Loans that have initial maturities between 1 and 10 years and are usually repaid in installments over the life of the loan.
2 classifications of secondary markets. (LO)
- 1. Listed security exchanges
- 2. OTC security markets
Type of secondary market that operates at a designated place of business and has requirements governing the types of securities it can list and trade.
Listed security exchanges
Type of secondary market that doesn't have a centralized place of business, but rather exists as a network of security dealers connected by a communications system.
Over-the-counter (OTC) security markets
2 types of members on the NYSE. (FD)
- 1. Floor brokers
- 2. Designated market makes
One of the main things a designated market maker does. (SM)
Ensure sufficient liquidity and minimal volatility in the stocks assigned to them.
Over-the-counter securities are not...
listed on exchanges.
The difference between the ask price and bid price.
An example of an OTC market would be the...
What 3 things make up the Dow Jones Composite Average? (DDD)
What type of index is the S&P 500?
Contracts that give the option buyer the right to either buy or sell a fixed amount of a foreign currency at a fixed price until the expiration date of the option.
2 types of options. (CP)
- 1. Call option
- 2. Put option
An option to buy something such as foreign currency.
An option to sell foreign currency.
Option that gives the holder the right to buy or sell the underlying currency until the expiration.
Option that gives the holder the right to buy or sell the underlying currency at the expiration.
A market where stock prices provide an unbiased estimate of the true, or intrinsic, value of an enterprise.
Efficient capital market
When the economic value of an investment = the market value, markets are...
2 ways financial managers add value to firms. (DH)
- 1. Determine the risks
- 2. Hedge the risks
What do stock prices reflect?
PV estimate of a firm's expected cash flows, evaluated at an appropriate required rate of return.
3 types of market efficiency. (WSS)
- 1. Weak-form
- 2. Semistrong-form
- 3. Strong-form
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