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35 Cards in this Set

  • Front
  • Back
product market
market for products (manufactured goods and services)
factor market
market for factors of production (labor and capital)
financial market
things that are traded; bought and sold
asset
any possession that has value in an exchange
tangible asset
value depends on physical properties; (buildings, land, machinery)
intangible asset
represent legal claims to some future benefit
financial asset
intangible asset; benefit is future cash
debt instrument
claim that the holder of a financial asset has is in fixed amounts; car loans, government/company bonds
equity instrument (residual claim)
issuer of financial asset must pay holder amount based on earnings, after holders debt instruments have been paid; common stock, partnership share
“combination instrument”/fixed-income instruments
preferred stock; equity instrument that entitles investor to receive a fixed dollar amount, after payments to debt instrument holders are made; or convertible bond; allows investor to convert debt into equity under certain circumstances
cash flow risks/uncertainties
purchasing power risk/inflation risk; credit risk/default risk; foreign-exchange risk
principle functions of financial assets
transfer surplus funds to invest to those who need to buy tangible assets; redistribute unavoidable risk associated with cash flow generated by tangible assets among the issuer + the investor
spot/cash market?
financial asset trades for immediate delivery
financial markets provide what three economic functions?
1. price delivery process (interaction of buyers/sellers)
2. liquidity (provides a market for an investor to sell a financial asset)
3. reduces cost of transacting (search costs; information costs)
search costs?
1. explicit costs (money spent to advertise one's intention to sell or purchase a financial asset)
2. implicit costs (time lost in locating a counterparty)
information costs?
costs associated with assessing the investment merits of a financial asset, amount and likelihood of the cash flow expected to be generated; price reflects this aggregate information in an efficient market
money market is for what?
short-term debt instruments
a capital market is for what?
longer-maturity financial assets
what is a primary market?
deals with financial claims that are newly issued
what is a secondary market?
exchange of financial claims previously issued
what are non-financial enterprises?
manufacture products (cars, steel) or provide nonfinancial services (transportation, utilities)
what 3 factors have led to the integration of financial markets?
1. deregulation or liberalization of markets; activities of market participants
2. technological advances for monitoring world markets, executing orders, analyzing financial opportunities
3. increased institutionalization of financial markets
what is a retail investor?
individuals
what is an internal market/national market composed of (2 parts):
domestic market (issued in home country, traded in home country) and the foreign market (issued in foreign country, traded in home country; security must comply with regulations of country where it is issued)
what are the two distinguishing characteristics of the external market/international market/offshore market/Euromarket?
1. at issuance securities are offered simultaneously to investors in a number of countries
2. securities are issued outside the jurisdiction of any single country
what motivates fund-seekers to use the foreign market/Euromarket (3)?
1. need substantial funding that they cannot find in the domestic market
2. find lower costs of funding
3. diversify source of funding so as to reduce reliance on domestic investors
define a derivative
contract that holder has obligation or choice to buy or sell at a future time
how does a derivative derive its value?
derives value from value of underlying financial asset, financial index, or interest rate
define futures/forward contracts
2 parties agree to transact a financial asset at a predetermined price at a specific future date; neither party charges a fee
define options contracts
owner of contract has right, but not obligation, to buy/sell a financial asset at a specified price from/to another party
what is an option price?
fee a buyer must pay to a seller
what is call option?
owner has option to buy a financial asset
what is a put option?
owner has option to sell financial asset
what are the advantages of a derivatives market (3)?
1. may cost less to execute transaction to adjust for risk than it would in a cash market
2. transactions happen faster
3. can absorb greater dollar transactions without adverse effects on derivative price; derivative market more liquid
what other general factors make derivatives useful (2)?
1. help adjust for risk
2. make financial markets more integrated