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66 Cards in this Set
- Front
- Back
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agency theory
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analysis of how asymmetric information problems affect economic behavior
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audits
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independent accounting firm certifies that the firm is adhering to standard accounting principles and disclosing accurate information about sales, assets and earnings
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collateral
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reduces consequences of adverse selection by reducing lender's losses in event of a default
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conflicts of interest
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type of moral hazard problem that arises when a person or institution that has multiple objectives (interests) and as a result has conflicts between those objectives
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costly state verification
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process to monitor firm's activities is expensive, makes equity contract less desirable
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creditors
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holders of debt
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economies of scope
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(in context of banks) lower the cost of information production for different services by applying one information to different applications (e.g. evaluating loan risk, using info to help do IPO)
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equity capital
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AKA net worth, assets minus liabilities
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free-rider problem
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occurs when people who do not pay for information take advantage of information that others have paid for
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incentive compatible
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aligns incentives of borrower with those of lender
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IPO
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shares of newly issued stock issued to raise equity capital
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pecking order hypothesis
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large firm more likely to issue securities rather than equity
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principal-agent problem
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occurs when managers own small part of equity. Principal (shareholders) have different interests than agent (managers), who may act in their own interest
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restrictive covenants
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provisions of loan documents restricting certain activities by the borrower
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secured debt
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collateralized debt
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spinning
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investment bank allocates hot, underpriced IPO stock to executives in exchange for future business
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state-owned banks
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bank owned by gvt., usually in developing and transition countries
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unsecured debt
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debt which is not collateralized (ie credit card debt)
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venture capital firm
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pool resources of partners and use funds to invest in young entrepreneurial ventures
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financial crisis
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occurs when anincrease in asymmetric information from a disruption in the financial system prevents the financial system from channeling funds efficiently from savers to households and firms with productive investment opportunities
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financial liberalization
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the elimination of restriction on financial markets and institutions, or the introduction of new types of loans or other financial products
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credit boom
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lending spree, dark side of financial liberalization
lenders may no have expertise or incentives to manage risk appropriately in new lines of business |
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deleveraging
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reducing dependence on debt
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asset-price bubble
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rise of assets about their fundamental economic values by investor psychology (ex tech stocks late 90s)
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bank panic
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multiple banks unable to pay off depositors and other creditors due to deteriorating balance sheets
exacerbated by depositor panic (bank run) |
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debt deflation
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a substantial unanticipated decline in the price level sets in, leading to further deterioration in firms' net worth because of the increased burden of indebtedness
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credit speads
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AKA risk premiums, return on securities
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securitization
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combination of various debt agreements into securities
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subprime mortgages
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mortgage to borrower with crap credit
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mortgage backed securities
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combining high risk mortgages into standardized debt security
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financial engineering
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development of new, sophisticated financial instruments products
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structured credit products
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derived from cash flows of underlying assets, tailored to particular risk characteristics of different investors
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collateralized debt obligations
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paid out cash flows from subprime mortgage backed securities into tranches (higher tranches, higher in pecking order in case of default)
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originate-to-distribute
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i.r.t. mortgage brokers originated subprime loans with intent to distribute (principle agent problem)
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credit default swaps
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insurance against default of MBS
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shadow banking system
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hedge funds, investment banks, other nondepository financial firms
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repurchase agreement (repo)
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short term borrowing which in effect uses assets like MBSs as collateral
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haircuts
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differential between value of collateral and value of loan (collateral > loan when collateral is shitty, like an MBS)
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emerging market economies
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economies in the early stage of market development that have recently opened up to the flow of goods, services and capital from the rest of the world
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financial globalization
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elimination of restrictions on financial institutions and markets domestically and opening up economies to flows of capital and financial firms from other nations
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speculative attack
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speculators engage in massive sales of currency
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asset components
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wealth, expected return, risk, liquidity
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asset market approach
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emphasizes stocks of assets rather than flows, preferred by economists
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Fisher effect
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when expected inflation rises, interest rates will rise
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wholesale markets
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most transactions very large, in excess of 1 million
prevent individual investors from directly participating |
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deep market
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many different buyers and sellers
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liquid market
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securities can be bought and sold quickly with low transaction costs
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competitive bidding
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treasury announces how many and what kind of T bills are for sale, accepts lowest yields first
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noncompetitive bidding
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statement of how many securities wanted, no price, all accepted
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book entry
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treasury information is all on a central computer, no actual bills issued
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term security
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maturity date is specified
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demand deposit
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can be withdrawn at any time
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bearer instrument
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whoever owns instrument at time of maturity receives cash flow, can be bought and sold
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direct placement
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issuer bypasses dealer and sells directly to end investor (saves commission)
used for commercial paper |
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asset backed commercial paper
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short term securities (>half 1-4 days) backed by assets
backed by CDOs 2004-7 |
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LIBID
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London Interbank Bid Rate. Rate paid by banks for funds internationally
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LIBOR
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London Interbank Overnight Rate. Rate offered for funds for sale internationally
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STRIPS
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Separate trading of registered interest and principal securities, to be stripped makes every payment a zero coupon security
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general obligation bonds
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municipal bonds backed by full faith and credit of issuer (nothing specific)
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revenue bonds
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municipal bonds backed by cash flow of a revenue generating project
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bond indenture
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contract that states the lender's rights and privileges and the borrower's obligations
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registered bonds
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replaced bearer bonds, must be registered with company (reports to IRS)
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call provision
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allow issuer to force bond holder to sell bond back (at higher price)
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sinking fund
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requirement in bond indenture that firm pay off a portion of the bond issue each year
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financial guarantee
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ensures that lender with be paid principal and interest in case of default (used by smaller firms)
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Credit Default Swap
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provides insurance against default in the principle, became deregulated in 2000
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