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fin 360 chap 1
quiz one prep
| Question | Answer |
|---|---|
| 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
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