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CPCU 560 1 - 3
Financial Markets and Institutions
50
Finance
Graduate
03/21/2006

Additional Finance Flashcards

 


 

Cards

Term
Financial Markets
Definition
the structures that facilitate the flow of funds between fund suppliers and fund users. Those with excess funds (fund suppliers) will offer the use of their funds to those in need of funds (fund users). The fund suppliers will expect to receive a rate of return on their investment.
Term
Initial Public Offerings (IPOs)
Definition
first-time issues of quity by firms allowing their shares to be publicly traded on stock markets for the first time.
Term
Derivative Security
Definition
a finanical instrument whose value is linked to the performance of an underlying security. Example - Options
Term
Secondary Markets
Definition
where securities that have already been issued are traded. Economic agents (consumers, corporations, governments) with excess funds buy secondary market securities. Economic agents in need of funds sell secondary market securities
Term
Over-the-Counter Market
Definition
a market that brings buyers and sellers together via telephone, wire transfers, and computer trading rather than on the floor of an exchange
Term
Money Market Instruments
Definition
securities with maturities of one year or less or long-term debt with one year of maturity remaining. Examples are commercial paper, repurchase agreements, negotiable CDs and Treasury bills
Term
Capital Market Instruments
Definition
equity and long-term (greater than 1 year maturity) debt instruments. Examples are corporate stocks, corporate bonds, and bonds backed by mortgage cash flows.
Term
Spot Foreign Exchange Transaction
Definition
the purchase or sale of foreign currencies at teh current exchange rate for immediate delivery.
Term
Spot Foreign Exchange Transaction
Definition
purchase or sale of foreign currencies at the current exchange rate for immediate delivery
Term
Forward Foreign Exchange Transaction
Definition
the trading of foreign currency at an established exchange rate but with payment and delivery at a specified date in the future.
Term
Financial Institutions (FIs)
Definition
serve as middlement between fund suppliers and fund users. Financial institutions provide monitoring and asset transformation services that in turn, reduce costs, provide liquidity, and reduce risks for the investor.
Term
Liquidity
Definition
a measure of how easily an asset can be converted into cash without any price discount
Term
Price Risk
Definition
the risk that the price at which an investor can sell a security will be lower than the price paid for the security
Term
Delegated Monitor
Definition
an appointed agent, such as teh FI, acting on behalf of small investors and can either invest funds, gather information, or both
Term
Interest Rate Risk
Definition
the risk that a financial institution's assets may supply a smaller cash flow than the cash flow demanded from its liabilities. This risk occurs when the maturities of its assets and liabilities are mismatched.
Term
Foreign Exchange Risk
Definition
the risk that the value of a foreign investment will decline due to the decline in the value of the currency in which it is held compared to the currency into which it will be converted.
Term
Market Risk
Definition
the risk that interset rate, exchange rate, or the stock market fluctuations will affect all securities of teh same general class since, generally, securities move in tandem with overall market indicies
Term
Credit Risk
Definition
the risk to the financial institution that a user of funds will not repay an obligation as promised.
Term
Liquidity Risk
Definition
the risk that a financial institution will be forced to quickly convert assets into cash and incur a significant loss.
Term
Off-ballance-sheet risk
Definition
the risk that activities related to contingent assets and liabilities (assets and liabilities that are not required to show up on a balance sheet) will negatively affect teh financial institution.
Term
Technology Risk
Definition
the possibility that a financial institution invests significant amounts of funds into technology in order to reduce costs and teh costs do not decline.
Term
Operational risk
Definition
the risk of loss resulting from a failure of existing technology or support system
Term
Country of Sovereign Risk
Definition
the risk that a foreign government will change national policy and interfere with repayments to foreign borrowers
Term
Insolvency Risk
Definition
the risk that a financial institution will not be able to pay its debts due to a sudden decline in the value of its assets. A financial institution becomes insolvent when its liabilities exceed its assets
Term
Eurodollar Bond
Definition
a dollar denominated bond sold to investors outside teh United States. Variations in teh exchange rate affect teh bond's value. Eurodollar bonds are not registered with teh SEC. Eurodollar bonds have served as an important source of international capital. 80% of new issues in teh international bond market are Eurodollar bonds.
Term
Federal Reserve
Definition
the central bank of the United States
Term
Discount Rate
Definition
the interest rate charged by the Federal reserve to its member banks to meet emergency or special liquidity situations.
Term
Federal Open Market Committee (FOMC)
Definition
the policy-making body of the Federal Reserve System. Its goal is to promote full employment, economic growth, price stability, adn a sustainable pattern of international trade.
Term
Open Market Operations
Definition
involve teh purchase/sale of government securities. It represents the major policy tool used by the Federal Reserve to implement its monetary policy.
Term
Required Reserves
Definition
must be held by law, by member banks at teh Federal Reserve Bank. Today, the reserve requirement is ten percent of demand deposit balances.
Term
Excess Reserves
Definition
are reserves in excess of required reserves taht member banks choose to hold at the Federal Reserve
Term
Federal Reserve Funds Rate
Definition
the rate on short-term inter-bank loans. Banks with excess reserves lend these reserves to banks in a deficit reserve position.
Term
Policy Directive
Definition
the monetary policy of teh Federal Open Market Committee is executed at teh Federal Reserve Tradign Desk at the Federal reserve Bank of New York. The policy is communicated to teh trading desk through a statement call teh POLICY DIRECTIVE
Term
Expansionary Activies
Definition
designed to increase the money supply and spur economic growth. They include open market purchases by teh Federal Reserve, lowering teh discount rate, adn reducing reserve requirements
Term
Contractionary Activies
Definition
designed to reduce the money supply and curtail the rate of growth. These include sale of government securites in the open market, increasing the discount rate, and raising reserve requirements on transaction deposits
Term
M1
Definition
one measure of the money supply. M1 is made up of the most spendable forms of money: cash and coin held by the public, traveler's checks, plus checking accounts.
Term
M2
Definition
the measure of the money supply that includes M1 plus savings accounts, money market mutual fund accounts, overnight repurchase agreements and time deposits less than $100,000. M2 is less liquid than M1.
Term
M3
Definition
the measure of the money supply that includes M2 plus time deposits over $100,000, balances in institutional money funds, repurchase agreements longer than overnight, and eurodollars held in foreign branches of U.S. banks. M3 is the most comprehensive measure of the money supply but includes the least liquid forms of money.
Term
Foreign Exchange Intervention
Definition
coordinated efforts by central banks to influence exchange rates by buying/selling currencies
Term
Opportunity Cost (of holding cash)
Definition
a measurement of the lost opportunity of not receiving interest on money that has not been invested.
Term
Default Risk
Definition
the uncertainty associated with the timely payment of interest and/or principal. Money market instruments are short-term issues characterized by high liquidity and virtually no price volatility. As such, they are deemed to be among the safests investments, in terms of default risk.
Term
Treasury bills
Definition
short-term government securities that cannot exceed one year to maturity. Sold on an auction-discounted basis, the purchaser receives the full face value at maturity. T-bills are often used as teh RF (risk-free) rate of return "number" when calculating various performance measurements
Term
Federal Funds
Definition
unsecured loans, usually on an overnight basis, that are transacted between financial institutions. The interst rate charged is the federal funds rate, an important component of the Federal Reserve Board's open market operations
Term
Repurchase Agreement (repos)
Definition
very short maturities ranging from 3-14 days with a minimum denomination of $100,000 whereby institutional lenders and borrowers agree to sell and repurchase governemtn securities. The interest rate is determined by the difference between the purchase and sales price.
Term
Commercial Paper
Definition
Denominations start at $100,000 and the maturity date cannot exceed 270 days. They are sold at discount at rates comparable to CDs. A small secondary market excists, but most issues are held to maturity
Term
Negotiable Certificates of Deposit (CD)
Definition
Instruments tha tmay be sold prior to maturity in an open market through dealers. Minimum deposit is $100,000; banks incur a deposit liability upon issuance. These CDs usually pay a higher rate of interest and are popular with money market fund managers
Term
Bearer Instrument
Definition
a financial promise to pay all principal and interest to any person who is the holder of teh instrument. A more liquid produt than a traditional bank CD, since an active secondary market exists for these dwindling financial vehicles.
Term
Banker's Acceptances
Definition
negotiable instruments normally transacted in international markets on a discounted basis. Banks originate time draft notes and agree to pay an agreed amount on a specified date
Term
Eurodollar Deposits
Definition
dollar denominated deposits held in U.S. bank offices of foreign countries. They are not limited to the European market. CDs comprise the largest part of the Eurodollar Market and usually offer a higher rate of return, as there are lesser regulatory requirements on foreign banks.
Term
London Interbank Offered Rate (LIBOR)
Definition
tied closely to the U.S. funds rate, it is the rate at which London institutions lend money among themselves. It has become the barometer for Short-term interest rates in European money markets and other borrowing and lending transactions.
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