Term
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Definition
-how quickly the asset can be converted to money
-near-monies- US T-Bills converts to money instantly, the most liquid asset |
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Term
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Definition
how much of a hit will you take selling something quickly as opposed to taking time to find an appropriate buyer?
-homes, for example, are very illiquid, but T-bills are very liquid |
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Term
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Definition
-the lower the denomenation, the more valuable the asset is
-this is why stocks split
-80,000 dollar homes flip faster than 10M dollar estates |
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Term
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Definition
how easily can a stock be turned around, how much is the round trip cost?
-the bid-ask spread defines this cost |
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Term
| costs associated with round-trip cost |
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Definition
holding- borrowing money to fund stocks in inventory, must restock stocks
order- expense of online systems, staff, buildings, attorneys
information- uninformed dealers affected by inside information
*All of these things make bid-ask spread neccesary to ensure profit for dealers |
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Term
| cash flow and return predictability |
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Definition
| higher interest rates lead to unpredicatability and bigger denominator, bigger denominator yields smaller price |
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Term
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Definition
solve double coincidence of wants, solve problem of asymmetric information
see figure 1 |
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Term
| Roles of Fin. Intermediaries |
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Definition
maturity intermediation- long term assets purchased, converted to liabilities, held as assets by depositors (people with surplus funds)
risk diversification- depositors fund the pool of projects, not just one
contracting costs- no need to hire attorneys for borrow/lend agreement. intermediate has premade contracts, processes...much cheaper
payments mechanism- easy way for wealth to be transferred through check-writing systems |
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Term
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Definition
exploits mispricings in the markets
-ability to profit immediately off of short-lived opportunities
-ex. look for misalignment of exchange rates, buy underpriced currency and sell overpriced
see figure 2 |
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Term
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Definition
-comes out of tail end of GD
-SEC created out of belief that there existed inadequate information about securities |
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Term
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Definition
-try to avoid market failure
-typically arises from asymmetric info
-lemons problem of market collapse |
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Term
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Definition
-holding any given 15 securities is enough to get rid of any particular idiosynchrasies of the market
-drives unique risk down to zero, leaves just market risk |
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Term
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Definition
Class I: amt known, timing known, ex. bond
Class II: amt. known, timing unknown, ec. life insurance
Class III: amt. unknown, timing known, ex. adjustable rate bond
Class IV: amt. unknown, timing unknown, ex. property and casualty insurance |
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Term
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Definition
| -form of financial innovation, assets are pooled and parts of pool are sold to individual investors |
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Term
| mortgage-backed securities |
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Definition
-type of securitization, pool of mortgages diversfies away any idiosynchratic risk
-began with Federal National Mortgage Association (Fannie Mae) which tried to support housing and home loans for veterans |
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Term
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Definition
| started mortgage-backed securities, original goal to support housing and home loans for veterans, split into FNMA which became quasi-govt sponsored enterprise, and Ginnie Mae, which took on old role of FNMA |
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Term
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Definition
did not stop w/ veteran's housing, entered world of securitization
-guaranteed banks pools of loans |
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Term
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Definition
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Term
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Definition
-The negative effects of prepayments
-refinancing when interest rates fall
-new loan now at lower rate, but old loan must be paid off
-investors receive lump sum that they must now reinvest at a lower interest rate |
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Term
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Definition
interest rates rise:
-investors stuck with interest rate they contracted for, receive no funds to reinvest at a higher rate |
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