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fin 360 chap 1

quiz one prep

QuestionAnswer
financial market a market in which financial assets(securities) such as stocks and bonds can be purchased or sold
What is the function of the financial markets? to transfer the funds from those who have excess funds to those who need funds
surplus units those who receive more money than they spend also known as investors
deficit units those who spend more money than they receive also known as borrowers
securities represent a claim on the issuer
debt securities represent debt (also call credit or borrowed funds) incurred by the issuer
who issues securities? deficit units issue the securities to surplus units and pay interest to the surplus units on a periodic basis(6 months)
equity securities represent equity or ownership in the issuer also known as stock
money markets financial markets that facilitate the flow of short term funds
capital market financial markets that facilitate the flow of long term funds
money market securities -debt securities that have a maturity of one year or less -high degree of liquidity -tend to have a low expected return -low degree of risk
primary market facilitate the issuance of new securities
secondary market facilitate the trading of existing securities, which allows from a change in the ownership of securities
liquidity the degree to which securities can easily be liquidiated(sold) without a loss of value
active secondary market that there are many willing buyers and sellers of the security at a given point in time
corporate finance involves decisions such as how much funding to obtain and how to invest the proceeds to expand operations
what do money markets enable corps to do? enable corps to borrow funds on a short term basis so that they can support their existing operations
what do capital markets enable corps to do? enable corps to obtain long term funds to support corp expansion
what is a major part of investment mgm? deciding which securities to purchase
what do financial institutions serve as? intermediaries that execute the transactions within the financial markets so that funds from investors are channeled to corps
risk used to represent the uncertainty surrounding the expected return
What is a common money market security? Treasury bills, commercial paper, negotiable CDs
What are capital market securities used to finance? the purchase of capital assets such as buildings, equipment, machinery
what are the 3 most common types of capital market securities? bonds, mortgages, stocks
mortgage-backed securities debt obligations representing claims on a package of mortgages -the investors who purchase these securities received monthly payments that are made by the homeowners on the mortgages backing the securities
derivative securities financial contracts whose values are derived from the values of underlying assets (such as debt securities or equity securities)
What do derivative securities do? enable investors to engage in speculation and risk mgm
speculation- derivative securities allow an investor to speculate on movements in the value of the underlying asset without having to purchase the asset
risk mgm derivative securities can be used in a manner that will generate gains if the value of the underlying assets declines
the valuation of a security is measured as the present value of its expected cash flows, discounted at a rate that reflects the uncertainty
because investors rely on valuation to make investment decisions, different investors may interpret and use info in different ways, thus they may derive different valuations of a security based on the available infor
when investors receive new information about a security that clearly indicates the likelihood of higher cash flows or less uncertainty, They revise their valuations of that security upward
when investors receive unfavorable info, they reduce the expected cash flows or increase the discount rate used in valuation; all valuations are revised downward
when security prices fully reflect all available information, the markets for these securities are referred to as efficient
behavioral finance application of psychology to make financial decisions; explains why markets are not always efficient
The Securities Act of 1933 intended to ensure complete disclosure of relevant financial info on publicly offered securities and to prevent fraudulent practices in selling these securities
The Securities Exchange Act of 1934 extended the disclosure requirements to secondary markets; also declared illegal a variety of deceptive practices such as misleading FSs and trading stratgies designed to manipulate the market price
SEC to oversee the securities markets
Sarbanes-Oxley Act require firms to provide more complete and accurate financial information; imposed restrictions to ensure proper auditing by auditors proper oversight by the firms b of d
privatizations the sale of govt owned firms to individuals
foreign exchange market facilitates the exchange of currencies;
perfect market all information about any securities for sale in primary and secondary markets would be continuously and freely available to investors
Created by: Mkear094