International Markets and Stock Exchange

Flashcards covering key vocabulary terms related to international markets, stock exchanges, financial markets, and monetary policy.

Direct Financing

Occurs when agents borrow funds directly from lenders without a financial intermediary.

Bond

A security (debt contract) requiring the borrower to make periodic payments for a specified period of time until maturity.

Money Markets

Trade short-term debt instruments (less than 1 year), including CP and T-bills.

Interest Rate (Yield)

The cost of borrowing, expressed in percentage annually.

Stocks

Share of ownership in a corporation, giving an ownership claim to the corporation’s earnings and assets.

S&P/TSX Composite Index

The benchmark Canadian index, representing about 250 companies of over 1,500 companies listed on the TSX.

Primary Market

New security issues are sold to initial buyers.

Secondary Market

Previously issued securities can be bought and sold.

Financial Intermediation

Financial institutions borrow funds and make loans to those who need funds.

Adverse Selection

Occurs when lenders decide not to make any loans even though good credit risks exist in the marketplace.

Moral Hazard

The risk that the borrower might engage in behaviors and activities that are undesirable from the lender’s point of view.

Financial Innovation

Development of new financial products and services.

Financial Crises

Major disruptions in financial markets, usually involving sharp declines in asset prices.

Money

Anything that is generally accepted as payment for goods or services, or to repay debts.

Inflation

A continual and broad-based increase in the price level.

Monetary Policy

Involves managing the money supply and interest rates, conducted by the Bank of Canada.

Fiscal Policy

Involves setting government expenditures and tax revenue, conducted by the government (Federal, Provincial).

Foreign Bonds

Sold in a foreign country, denominated in that foreign country’s currency.

Eurobond

Sold in a foreign country, denominated in another currency, usually USD.

Eurocurrencies

Foreign currencies deposited in banks outside the home country.

Foreign Exchange (FX) Market

Where funds are converted from one currency into another.

Aggregate Output

Gross domestic product (GDP) is the market value of all final goods and services produced in a country during the course of a year.

Aggregate Income

The total income of factors of production from producing goods and services in the economy during the year.

Consumer Price Index (CPI)

Measured by pricing a “basket” of goods and services bought by a typical urban household.

Medium of Exchange

Facilitates exchange and lowers transaction costs.

Unit of Account

Units in which value is denominated throughout the economy.

Store of Value

Maintains purchasing power over time.

Commodity Money

Money made of precious metals (gold, silver).

Fiat Money

Paper money decreed by governments as legal tender.

Present Value

Discounted value of cash flows into today’s value.

Yield to Maturity

The interest rate that equates the present value of all cash flow payments received from a debt instrument with its value today.

Interest-Rate Risk

The risk level associated with an asset’s return that results from interest-rate changes.

Real Interest Rates

Adjusted for changes in price level.

Nominal Interest Rates

Make no allowance for inflation.

Fisher Equation

i = r + 𝜋e (nominal interest rate = real interest rate + expected inflation rate)

Theory of Portfolio Choice

Holding all other factors constant, the quantity demanded of an asset is: 1. positively related to wealth 2. positively related to its expected return relative to alternative assets 3. negatively related to the risk of its returns relative to alternative assets 4. positively related to its liquidity relative to alternative assets

Market Equilibrium

Occurs when the amount demanded at a given bond price equals the amount supplied.

Liquidity Preference Framework

Interest rates are determined by equilibrium in both money and bond markets.

Default Risk

Probability that the issuer of the bond is unable or unwilling to make interest payments or pay off the face value.

Risk Premium

The spread between the interest rates on bonds with default risk and the interest rates on (same maturity) Canada bonds.

Yield Curve

A plot of the yield on bonds with differing terms to maturity but the same risk, liquidity, and tax considerations.

Common Stock

Principal way that corporations raise equity capital.

The Efficient Market Hypothesis

Rational Expectations in Financial Markets where a security’s price fully reflects all available information

Tangible Common Equity

Common equity less intangible assets (i.e., copyrights and patents, brand names, and goodwill)

Domestic Stability Buffer

To mitigate risks associated with systemic vulnerabilities