quiz one prep
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| financial market | a market in which financial assets(securities) such as stocks and bonds can be purchased or sold
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| What is the function of the financial markets? | to transfer the funds from those who have excess funds to those who need funds
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| surplus units | those who receive more money than they spend
also known as investors
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| deficit units | those who spend more money than they receive
also known as borrowers
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| securities | represent a claim on the issuer
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| debt securities | represent debt (also call credit or borrowed funds) incurred by the issuer
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| who issues securities? | deficit units issue the securities to surplus units and pay interest to the surplus units on a periodic basis(6 months)
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| equity securities | represent equity or ownership in the issuer
also known as stock
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| money markets | financial markets that facilitate the flow of short term funds
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| capital market | financial markets that facilitate the flow of long term funds
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| 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
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| primary market | facilitate the issuance of new securities
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| secondary market | facilitate the trading of existing securities, which allows from a change in the ownership of securities
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| liquidity | the degree to which securities can easily be liquidiated(sold) without a loss of value
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| active secondary market | that there are many willing buyers and sellers of the security at a given point in time
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| corporate finance | involves decisions such as how much funding to obtain and how to invest the proceeds to expand operations
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| 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
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| what do capital markets enable corps to do? | enable corps to obtain long term funds to support corp expansion
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| what is a major part of investment mgm? | deciding which securities to purchase
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| what do financial institutions serve as? | intermediaries that execute the transactions within the financial markets so that funds from investors are channeled to corps
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| risk | used to represent the uncertainty surrounding the expected return
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| What is a common money market security? | Treasury bills, commercial paper, negotiable CDs
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| What are capital market securities used to finance? | the purchase of capital assets such as buildings, equipment, machinery
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| what are the 3 most common types of capital market securities? | bonds, mortgages, stocks
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| 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
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| derivative securities | financial contracts whose values are derived from the values of underlying assets (such as debt securities or equity securities)
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| What do derivative securities do? | enable investors to engage in speculation and risk mgm
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| speculation- | derivative securities allow an investor to speculate on movements in the value of the underlying asset without having to purchase the asset
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| risk mgm | derivative securities can be used in a manner that will generate gains if the value of the underlying assets declines
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| the valuation of a security is measured | as the present value of its expected cash flows, discounted at a rate that reflects the uncertainty
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| 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
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| 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
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| when investors receive unfavorable info, they | reduce the expected cash flows or increase the discount rate used in valuation; all valuations are revised downward
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| when security prices fully reflect all available information, the markets for these securities are | referred to as efficient
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| behavioral finance | application of psychology to make financial decisions; explains why markets are not always efficient
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| 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
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| 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
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| SEC | to oversee the securities markets
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| 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
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| privatizations | the sale of govt owned firms to individuals
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| foreign exchange market | facilitates the exchange of currencies;
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| perfect market | all information about any securities for sale in primary and secondary markets would be continuously and freely available to investors
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