Fin Mrkts-Ch2

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ADVERSE SELECTION

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THE PROBLEM CREATED BY ASYMMETRIC INFORMATION BEFORE A TRANSACTION OCCURS; THE PEOPLE WHO ARE THE MOST UNDESIRABLE FROM THE OTHER PARTY'S POINT OF VIEW ARE THE ONES WHO ARE MOST LIKELY TO WANT TO ENGAGE IN THE FINANCIAL TRANSACTION.

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ASYMMETRIC INFORMATION

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THE INEQUALITY OF KNOWLEDGE THAT EACH PARTY TO A TRANSACTION HAS ABOUT THE OTHER PARTY.

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BROKERS

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AGENTS FOR INVESTORS WHO MATCH BUYERS WITH SELLERS.

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CAPITAL MARKETS

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A FINANCIAL MARKET IN WHICH LONGER-TERM DEBT (MATURITY GREATER THAN ONE YEAR) AND EQUITY INSTRUMENTS ARE TRADED.

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DEALERS

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PEOPLE WHO LINK BUYERS WITH SELLERS BY BUYING AND SELLING SECURITIES AT STATED PRICES.

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DIVIDENDS

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PERIODIC PAYMENTS MADE BY EQUITIES TO SHAREHOLDERS

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ECONOMIES OF SCALE

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SAVINGS THAT CAN BE ACHIEVED THROUGH INCREASED SIZE.

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EQUITIES

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CLAIMS TO SHARE IN THE NET INCOME AND ASSETS OF A CORPORATION (SUCH AS COMMON STOCK).

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EUROBONDS

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BONDS DENOMINATED IN A CURRENCY OTHER THAN THAT OF THE COUNTRY IN WHICH THEY ARE SOLD.

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EUROCURRENCIES

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FOREIGN CURRENCIES DEPOSITED IN BANKS OUTSIDE THE HOME COUNTRY.

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EURODOLLARS

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US DOLLARS THAT ARE DEPOSITED IN FOREIGN BANKS OUTSIDE OF THE UNITED STATES OR IN FOREIGN BRANCHES OF US BANKS.

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EXCHANGES

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SECONDARY MARKETS IN WHICH BUYERS AND SELLERS OF SECURITIES (OR THEIR AGENTS OR BROKERS) MEET IN ONE CENTRAL LOCATION TO CONDUCT TRADES.

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FINANCIAL INTERMEDIATION

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THE PROCESS OF INDIRECT FINANCE WHEREBY FINANCIAL INTERMEDIARIES LINK LENDER-SAVERS AND BORROWER-SPENDERS

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FINANCIAL PANIC

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THE WIDESPREAD COLLAPSE OF FINANCIAL MARKETS AND INTERMEDIARIES IN AN ECONOMY.

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FOREIGN BONDS

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BONDS SOLD IN A FOREIGN COUNTRY AND DENOMINATED IN THAT COUNTRY'S CURRENCY.

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INTERMEDIATE-TERM

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WITH REFERENCE TO A DEBT INSTRUMENT, HAVING A MATURITY OF BETWEEN ONE AND TEN YEARS.

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INVESTMENT BANKS

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FIRMS THAT ASSIST IN THE INITIAL SALE OF SECURITIES IN THE PRIMARY MARKET.

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LONG-TERM

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WITH REFERENCE TO A DEBT INSTRUMENT, HAVING A MATURITY OF TEN YEARS OR MORE.

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MATURITY

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TIME TO THE EXPIRATION DATE (MATURITY DATE) OF A DEBT INSTRUMENT.

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MONEY MARKET

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A FINANCIAL MARKET IN WHICH ONLY SHORT-TERM DEBT INSTRUMENTS (MATURITY OF LESS THAN ONE YEAR) ARE TRADED.

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MORAL HAZARD

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THE RISK THAT ONE PARTY TO A TRANSACTION WILL ENGAGE IN BEHAVIOR THAT IS UNDESIRABLE FROM THE OTHER PARTY'S POINT OF VIEW.

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OVER THE COUNTER (OTC) MARKET

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A SECONDARY MARKET IN WHICH DEALERS AT DIFFERENT LOCATIONS WHO HAVE AN INVENTORY OF SECURITIES STAND READY TO BUY AND SELL SECURITIES TO ANYONE WHO COMES TO THEM AND IS WILLING ACCEPT THEIR PRICES.

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PRIMARY MARKET

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A FINANCIAL MARKET IN WHICH NEW ISSUES OF A SECURITY ARE SOLD TO INITIAL BUYERS.

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REGULATION Q

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THE REGULATION UNDER WHICH THE FEDERAL RESERVE SYSTEM HAS THE POWER TO SET MAXIMUM INTEREST RATES THAT BANKS CAN PAY ON SAVINGS AND TIME DEPOSITS.

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RESERVE REQUIREMENTS

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REGULATIONS MAKING IT OBLIGATORY FOR DEPOSITORY INSTITUTIONS TO KEEP A CERTAIN FRACTION OF THEIR DEPOSITS IN ACCOUNTS WITH THE FED.

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SECONDARY MARKET

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A FINANCIAL MARKET IN WHICH SECURITIES THAT HAVE PREVIOUSLY BEEN ISSUED CAN BE RESOLD

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THRIFT INSTITUTIONS

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SAVINGS AND LOAN ASSOCIATIONS, MUTUAL SAVINGS BANKS, AND CREDIT UNIONS.

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TRANSACTION COSTS

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THE TIME AND MONEY SPENT TRYING TO EXCHANGE FINANCIAL ASSETS, GOODS, OR SERVICES.

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UNDERWRITING

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GUARANTEEING PRICES ON SECURITIES TO CORPORATIONS AND THEN SELLING THE SECURITIES TO THE PUBLIC.

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COMMON STOCK

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A SECURITY THAT GIVES THE HOLDER AN OWNERSHIP INTEREST IN THE CASH FLOW OF THE FIRM AND CLAIMS ON THE PROFITS OF THE FIRM (AFTER EXPENSES, INCLUDING BOND INTEREST, ARE PAID)

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ORGANIZED MARKET

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A SECURITIES MARKET WITH A TRADING FLOOR, LIKE THE NEW YORK STOCK EXCHANGE.

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NAME SOME MONEY MARKET SECURITIES.

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TREASURY BILLS, COMMERCIAL PAPER, NEGOTIABLE CD'S, FED FUNDS, EURODOLLARS.

THEY ARE SECURITIES THAT HAVE AN ORIGINAL MATURITY OF LESS THAN ONE YEAR.

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NAME SOME CAPITAL MARKET SECURITIES.

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COMMON AND PREFERRED STOCK, BONDS (CORPORATE, MUNICIPAL, TREASURY), AND MORTGAGES

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WHAT ARE THE BENEFITS OF FINANCIAL INTERMEDIATION?

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1. DENOMINATION AND MATURITY
INTERMEDIATION.
2. LIQUIDITY
3. MONITORING AND EXPERT OVERSIGHT.
4. DIVERSIFICATION (ESPECIALLY CREDIT
RISK DIVERSIFICATION).
5. THEY CAN LOWER TRANSACTION COSTS
DUE TO ECONOMIES OF SCALE.

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NAME THE DEPOSITORY FINANCIAL INSTITUTIONS.

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BANKS, CREDIT UNIONS, SAVINGS AND LOANS, SAVINGS BANKS