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Financial Systems II


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Liquidity management
Strategic management issues of intermediated finance
Capital risk
the risk that a corporation will not have sufficient capital to expand the business and maintain the desired debt to equity ratio
Operations risk
a risk generated by fraud, failure of internal systems or staff error e.g. internal and external fraud, employment practices and workplace safety, clients, products and business practices
Indirect Finance
When borrowers and lenders are matched through financial intermediaries
Financial Markets
Markets in which funds are transferred from people with a surplus (savers) to people who have a shortage (borrowers)
Security
Claim on future income or assets of the issuer. Either debt or equity
Assets
Accounts receivable, what others owe to you
Liabilities
Accounts payable, what you owe to others
Maturity
# of years until a debt instrument expries
Interest Rate
Cost of borrowing funds
Equity
Claim to a share in net income and assets of a business
Common Stock
Share of an ownership in a corporation
Dividends
Periodic payments made off of equities to owners of that equity. Considered long-term securities since they have no maturity date
Primary Market
financial market where issues of a security are sold to initial buyers by the borrower
Private Placements
New securities (usually debt) are directly sold to financial institutions (e.g. life insurance companies and pension funds) bypassing the open market
Secondary Market
Financial market where securities have been previously issued are resold
Examples of secondary markets
NYSE, AMEX, and NASDAQ
Broker
Match buyers of securities w/ sellers. Don't maintain inventories in these assets and locate buyer/seller to complete transactions ordered by another party. Profit is made off commission they charge to the buyer/seller/both
Dealer
Maintain/sell out inventories instead of always have to locate a seller to match to buy and vice versa. Don't make commission, make bid-ask spread
exchanges
Most equities are traded in _______
Money Markets
financial markets where only short-term debt instruments (having original maturity of less than 1 year) are traded.
Capital Markets
These are financial markets where longer-term debt instruments
Are money or capital markets more liquid?
Capital. These are used more by corporations and banks that
Eurocurrency
Currency deposited outside banks in the home country
Stocks
Only equity in capital market
Mortgages
These are loans to buy real assets where the asset being purchased is
Federal, State, & Local Government Bonds
Similar to corporate bonds. These are sold at auctions and have maturities of between 10 and 30 years.
Consumer Loans
These are loans made by commercial banks to households
Commercial Loans
These are loans made by commercial banks to firms.
Foreign bonds
Bonds sold in a foreign country and denominated in that country's currency
Eurobonds
Bonds denominated in a currency other than that of the country where it's being sold
Pension Funds
These acquire funds by periodic contributions from employers or