Money & Banking study guide

Nominal values are measured using current price

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Nominal = values are measured using current price (misleading) Ch. 2 // An Overview of the Financial System Lender-Savers = HH (left) Borrower-Spenders = gov’t & businesses (right) Direct Finance – borrowers borrow funds directly from lenders in financial markets by selling them securities Liabilities : IOUs or debts Financial markets service to be profitable (interest) – investment opportunities Capital : wealth, either financial or physical, that is employed to produce more wealth Maturity : of a debt instrument is the number of years (term) until the instrument’s expiration date - ST: < 1 year - IT: 1-10 years - LT: 10+ years Equities : common stock (claims to share in the net income and the assets of business) - = Residual claimant : corporation must pay all debt holders before equity holders - = Equity holders benefit directly from increases in corp’s profitability or asset value b/c equities confer ownership rights on equity holders Dividends : periodic payments; equities make this Primary market : financial market in which new issues of a security (like bonds or stock) are sold to initial buyers by the corporation or gov’t agency borrowing the funds - Investment bank : financial institution that assists in the initial sale of securities in the primary market; does this by - Underwriting securities: guarantees a price for a corporation’s securities & then sells them to the public Secondary market : financial market in which securities that have been previously issued can be resold - NYSE & NADAQ - Securities brokers & dealers are crucial to a functioning secondary market - Brokers : agents of investors who match buyers with sellers of securities - Dealers : link buyers and sellers by buying and selling securities at stated prices - Person who sold the security receives money in exchange for the security, but the corp that issued the security acquires no new funds; corp acquires new funds only when its securities are first sold in the primary market - Secondary market has 2 important functions: o Make it easier & quicker to sell these financial instruments to raise cash (making it more liquid – making it more desirable & easier to sell) o Determine the price of the security that the issuing firm sells in the primary market; higher security’s price in secondary market, higher the
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price that the issuing firm will receive for a new security in the primary market (financial capital rises) - Can organize secondary markets by exchanges or OTC market - Exchanges : buyers & sellers of securities meet in one central location to conduct trades - OTC market : dealers at different locations who have an inventory of securities stand ready to buy and sell securities “OTC” to anyone who comes to them and is willing to accept their prices; via computers & know the prices set by one another; very competitive Can distinguish b/t markets on the basis of maturity of securities traded in each market Money market : financial market in which only ST debt instruments are traded; more
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