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66 Cards in this Set

  • Front
  • Back
agency theory
analysis of how asymmetric information problems affect economic behavior
audits
independent accounting firm certifies that the firm is adhering to standard accounting principles and disclosing accurate information about sales, assets and earnings
collateral
reduces consequences of adverse selection by reducing lender's losses in event of a default
conflicts of interest
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
costly state verification
process to monitor firm's activities is expensive, makes equity contract less desirable
creditors
holders of debt
economies of scope
(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)
equity capital
AKA net worth, assets minus liabilities
free-rider problem
occurs when people who do not pay for information take advantage of information that others have paid for
incentive compatible
aligns incentives of borrower with those of lender
IPO
shares of newly issued stock issued to raise equity capital
pecking order hypothesis
large firm more likely to issue securities rather than equity
principal-agent problem
occurs when managers own small part of equity. Principal (shareholders) have different interests than agent (managers), who may act in their own interest
restrictive covenants
provisions of loan documents restricting certain activities by the borrower
secured debt
collateralized debt
spinning
investment bank allocates hot, underpriced IPO stock to executives in exchange for future business
state-owned banks
bank owned by gvt., usually in developing and transition countries
unsecured debt
debt which is not collateralized (ie credit card debt)
venture capital firm
pool resources of partners and use funds to invest in young entrepreneurial ventures
financial crisis
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
financial liberalization
the elimination of restriction on financial markets and institutions, or the introduction of new types of loans or other financial products
credit boom
lending spree, dark side of financial liberalization

lenders may no have expertise or incentives to manage risk appropriately in new lines of business
deleveraging
reducing dependence on debt
asset-price bubble
rise of assets about their fundamental economic values by investor psychology (ex tech stocks late 90s)
bank panic
multiple banks unable to pay off depositors and other creditors due to deteriorating balance sheets

exacerbated by depositor panic (bank run)
debt deflation
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
credit speads
AKA risk premiums, return on securities
securitization
combination of various debt agreements into securities
subprime mortgages
mortgage to borrower with crap credit
mortgage backed securities
combining high risk mortgages into standardized debt security
financial engineering
development of new, sophisticated financial instruments products
structured credit products
derived from cash flows of underlying assets, tailored to particular risk characteristics of different investors
collateralized debt obligations
paid out cash flows from subprime mortgage backed securities into tranches (higher tranches, higher in pecking order in case of default)
originate-to-distribute
i.r.t. mortgage brokers originated subprime loans with intent to distribute (principle agent problem)
credit default swaps
insurance against default of MBS
shadow banking system
hedge funds, investment banks, other nondepository financial firms
repurchase agreement (repo)
short term borrowing which in effect uses assets like MBSs as collateral
haircuts
differential between value of collateral and value of loan (collateral > loan when collateral is shitty, like an MBS)
emerging market economies
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
financial globalization
elimination of restrictions on financial institutions and markets domestically and opening up economies to flows of capital and financial firms from other nations
speculative attack
speculators engage in massive sales of currency
asset components
wealth, expected return, risk, liquidity
asset market approach
emphasizes stocks of assets rather than flows, preferred by economists
Fisher effect
when expected inflation rises, interest rates will rise
wholesale markets
most transactions very large, in excess of 1 million

prevent individual investors from directly participating
deep market
many different buyers and sellers
liquid market
securities can be bought and sold quickly with low transaction costs
competitive bidding
treasury announces how many and what kind of T bills are for sale, accepts lowest yields first
noncompetitive bidding
statement of how many securities wanted, no price, all accepted
book entry
treasury information is all on a central computer, no actual bills issued
term security
maturity date is specified
demand deposit
can be withdrawn at any time
bearer instrument
whoever owns instrument at time of maturity receives cash flow, can be bought and sold
direct placement
issuer bypasses dealer and sells directly to end investor (saves commission)

used for commercial paper
asset backed commercial paper
short term securities (>half 1-4 days) backed by assets

backed by CDOs 2004-7
LIBID
London Interbank Bid Rate. Rate paid by banks for funds internationally
LIBOR
London Interbank Overnight Rate. Rate offered for funds for sale internationally
STRIPS
Separate trading of registered interest and principal securities, to be stripped makes every payment a zero coupon security
general obligation bonds
municipal bonds backed by full faith and credit of issuer (nothing specific)
revenue bonds
municipal bonds backed by cash flow of a revenue generating project
bond indenture
contract that states the lender's rights and privileges and the borrower's obligations
registered bonds
replaced bearer bonds, must be registered with company (reports to IRS)
call provision
allow issuer to force bond holder to sell bond back (at higher price)
sinking fund
requirement in bond indenture that firm pay off a portion of the bond issue each year
financial guarantee
ensures that lender with be paid principal and interest in case of default (used by smaller firms)
Credit Default Swap
provides insurance against default in the principle, became deregulated in 2000