Economics (Ch.2 -- An Overview Of The Financial System)

Front 1

Liabilities

Back 1

IOU's or debts for the individual or firm that sells (issues) them.

Front 2

Maturity

Back 2

Number of years (term) until that debt instrument's expiration date.

Front 3

Short-term

Back 3

If maturity is less than a year.

Front 4

Long-term

Back 4

If maturity is 10 years or longer.

Front 5

Medium-term

Back 5

If maturity is between 1 and 10 years.

Front 6

Equities

Back 6

i.e. common stock, which are claims to share in the net income (income after expenses and taxes) and the assets of a business.

Front 7

Dividends

Back 7

Payments to shareholders from the company.

Front 8

Primary market

Back 8

A financial market in which new issues of a security, such as a bond or a stock, are sold to initial buyers by the corporation or government agency borrowing the funds.

Front 9

Secondary market

Back 9

A financial market in which securities that have been previously issued can be resold.

Front 10

Investment bank

Back 10

Assists in the initial sale of securities in the primary market by underwriting securities.

Front 11

Underwriting

Back 11

Guaranteeing a price for a corporation's securities and then selling them to the public.

Front 12

Brokers

Back 12

Agents of investors who match buyers with sellers of securities.

Front 13

Dealers

Back 13

Link buyers and sellers by buying and selling securities at stated prices.

Front 14

Liquid

Back 14

Easily converted to cash

Front 15

Exchanges

Back 15

Where buyers and sellers of securities (or their agents or brokers) meet in one central location to conduct trades.

Front 16

Over the counter (OTC) market

Back 16

Dealers at different locations who have an inventory of securities stand ready to buy and sell securities "over the counter" to anyone who comes to them and is willing to accept their prices.

Front 17

Money market

Back 17

A financial market in which only short-term debt instruments (generally those with original maturity of less than one year) are traded.

Front 18

Capital market

Back 18

The market in which longer-term debt (generally those with original maturity of one year or greater) and equity instruments are traded.

Front 19

Treasury bills

Back 19

Most liquid of all money market instruments.
Most actively traded.
Safest because no possibility of DEFAULT.

Front 20

Default

Back 20

A situation in which the party issuing the debt instrument is unable to make interest payments or pay off the amount owed when the instrument matures.

Front 21

Certificate of Deposit (CD)

Back 21

A debt instrument sold by a bank to depositors that pays annual interest of a given amount and at maturity pays back the original purchase price.

Front 22

Bearer deposit notes

Back 22

The buyer's name is neither recorded in the issuer's books nor on the security itself.

Front 23

Term deposit receipts or term notes

Back 23

Certificates of deposit issued, ranging from $5,000 to $100,000 and with maturities of 30 to 365 days.

Front 24

Commercial paper

Back 24

an unsecured short term debt instrument issued in either Canadian dollars or other currencies by large banks and well-known corporations, such as Microsoft or General Motors.

Front 25

Finance paper

Back 25

Short-term promissory notes issued by Sales finance companies.

Front 26

Banker's acceptance

Back 26

A bank draft (a promise of payment similar to a cheque) issued by a firm, payable at some future date, and guaranteed for a fee by the bank that stamps it "accepted."

Front 27

Repurchase agreements (repos)

Back 27

Short-term loans (usually with a maturity of less than two weeks) for which treasury bills serve as collateral, an asset that the lender receives if the borrower does not pay back the loan.

Front 28

Overnight funds

Back 28

Overnight loans by banks to other banks.

Front 29

Overnight interest rate

Back 29

The interest rate on overnight loans.

Front 30

Capital market instruments

Back 30

Debt and equity instruments with maturities of greater than one year. They have far wider price fluctuations than money market instruments and are considered to be fairly risky investments.

Front 31

Stocks

Back 31

Equity claims on the net income and assets of a corporation.

Front 32

Mortgages

Back 32

Loans to households or firms to purchase housing, land, or other real structures, where the structure or land serves as collateral for the loans.

Front 33

Corporate bonds

Back 33

Long-term bonds issued by corporation with very strong credit ratings.
* Sends the holder an interest payment twice a year and pays off the face value when the bond matures.

Front 34

Convertible bonds

Back 34

Much like corporate bonds but with the additional feature of allowing the holder to convert them into a specified number of shares of stock at any time up to the maturity date.

Front 35

Registered bonds

Back 35

The name of the owner appears on the bond certificate and is also recorded at the Bank of Canada.

Front 36

Canada savings bonds

Back 36

Nonmarketable bonds issued by the government of Canada and sold each year from early October through to April 1.
* Floating-rate bonds, available in denominations from $100 to $10,000

Front 37

Provincial & municipal government bonds

Back 37

Issued by provincial and municipal governments to finance expenditures on schools, roads, and other large programs.

Front 38

Government agency securities

Back 38

Long-term bonds issued by various government agencies such as the Ontario Municipal Improvement Corporation and the Alberta Municipal Financing Corporation to assist municipalities to finance such items as mortgages, farm loans, or power-generating equipment.

Front 39

Consumer and bank commercial loans

Back 39

These are loans to consumers and businesses made principally by banks, but-in the case of consumer loans--also by finance companies.

Front 40

Foreign bonds

Back 40

Are sold in a foreign country and are denominated in the country's currency.
i.e. If the German automaker Porsche sells a bond in Canada denominated in Canadian dollars, it is classified as a foreign bond.

Front 41

Eurobond

Back 41

A bond denominated in a currency other than that of the country in which it is sold.
i.e. A bond issued by a Canadian corporation that is denominated in Japanese yen and sold in Germany.

Front 42

Eurocurrencies

Back 42

Foreign currencies deposited in banks outside the home country.
* A variant of the Eurobond.

Front 43

Eurodollars

Back 43

Eurocurrencies which are U.S. dollars deposited in foreign banks outside the United States or in foreign branches of U.S. banks.

Front 44

Indirect finance a.k.a. Financial intermediation

Back 44

Involves a financial intermediary which stands between the lender-savers and the borrower-spenders and helps transfer funds from one to the other.

Front 45

Transaction costs

Back 45

Time and money spent in carrying out financial transactions.

Front 46

Economies of scale

Back 46

Reduction in transaction costs per dollar of transactions as the size (scale) of transactions increases.
i.e. A bank knows how to find a good lawyer to produce an airtight loan contract, and this contract can be used over and over again in its laon transactions, thus lowering the legal cost per transaction.

Front 47

Liquidity services

Back 47

Services that make it easier for customers to conduct transactions.

Front 48

Risk

Back 48

Uncertainty about the returns investors will earn on assets.

Front 49

Risk sharing a.k.a Asset transformation

Back 49

They create and sell assets with risk characteristics that people are comfortable with, and the intermediaries then use the funds they acquire by selling theses assets to purchase other assets that may have far more risk .

Front 50

Diversification

Back 50

Entails investing in a collection (portfolio) of assets where returns do not always move together, with the result that overall risk is lower than for individual assets.

Front 51

Asymmetric information

Back 51

One party often does not know enough about the other party to make accurate decisions.

Front 52

Adverse selection

Back 52

The problem created by asymmetric information before transaction occurs.

Front 53

Moral hazard

Back 53

The problem created by asymmetric information after the transaction occurs.

Front 54

Depository institutions

Back 54

Financial intermediaries that accept deposits from individuals and institutions and make loans.

Front 55

Chartered banks

Back 55

These financial intermediaries raise funds primarily by issuing chequable deposits (deposits on which cheques can be written), savings deposits (deposits that are payable on demand but do not allow their owner to write cheques, and term deposits (deposits with fixed terms to maturity).

Front 56

Trust and mortgage loan companies (TMLs)

Back 56

These depository institutions, numbering 66, obtain funds primarily through chequable and non-chequable savings deposits, term deposits, guaranteed investment certificates, and debentures.

Front 57

Credit Unions & Caisses populaires

Back 57

Very small cooperative lending institutions organized around a particular group: union members, employees of a particular firm, and so forth.

Front 58

Contractual savings institutions

Back 58

Such as insurance companies,and pension funds.

Front 59

Life insurance companies

Back 59

Numbering 95, insure people against financial hazards following a death and sell annuities (annual income payments upon retirement.)
*They buy corporate bonds and mortgages as well as stocks but are restricted in the amount that they can hold.

Front 60

Property and casualty (P&C insurance companies

Back 60

Numbering 187, insure their policyholders against loss from theft, fire, and accidents.
*They use their funds to buy more liquid assets than life insurance companies do.

Front 61

Pension funds and government retirement funds

Back 61

Provide retirement income in the form of annuities to employees who are covered by a pension plan.
*The largest asset holdings of pension funds are corporate bonds.

Front 62

Investment intermediaries

Back 62

Includes finance companies, mutual funds, and money market mutual funds.

Front 63

Finance companies

Back 63

Raise funds by selling commercial paper (a short-term debt instrument) and by issuing stocks and bonds.
They lend those funds to consumers who make purchases such as furniture or cars.

Front 64

Mutual funds

Back 64

Acquire funds by selling shares to many individuals and use the proceeds to purchase diversified portfolios of stocks and bonds.
* Risky investment
* Mutual funds allow shareholder to pool their resources so that they can take advantage of lower transaction costs when buying large block of stocks or bonds.

Front 65

Money market mutual funds

Back 65

Have the characteristics of mutual funds but also function to some extent as depository institutions because they offer deposit-type accounts.
*They sell shares to acquire funds that are then used to buy money market instruments that are both safe and very liquid.
*Interest on these assets are paid out to shareholders.

Front 66

Financial panic

Back 66

Widespread collapse of financial intermediaries.

Front 67

Restrictions on entry

Back 67

Tight regulations governing who is allowed to set up a financial intermediary.

Front 68

Disclosure

Back 68

Stringent reporting requirements for financial intermediaries.

Front 69

Restrictions on assets and activities

Back 69

Restrictions on what financial intermediaries are allowed to do and what assets they can hold.

Front 70

Deposit insurance

Back 70

The government can insure people's deposits so that they do not suffer any financial loss if the financial intermediary that hold these deposits fails.

Front 71

Limits on Competition

Back 71

Politicians have often declared that unbridled competition among financial intermediaries promotes failures that will harm the public. Therefore setting limiting the number of financial intermediaries that exist.