2.1 The Importance of Financial Markets and Institutions

Financial environments have 2 main segments:

financial markets and financial institutions

When businesses have a surplus of cash, and no need for immediate financing, they have to (BLANK) the cash

invest

Lend small amounts to the poor in developing nations to help them launch small enterprises

microfinance institutions

The interest rates on microfinance loans are relatively

high

When the direct source of Apple’s financing is an intermediary such as a bank or mutual fund, the ultimate source is the worldwide community of

investors

Examples of financial institutions

banks and insurance companies

Examples of financial intermediaries

mutual funds and pension funds

Examples of financial markets

Stock markets, fixed-income markets, and money markets

market where securities are issued and traded

financial market

A security is just a traded (BLANK), such as a share of stock

financial asset

The first issue of shares on an organized exchange such as the New York Stock Exchange (NYSE) or NASDAQ is called an

initial public offering (IPO)

market for the sale of new securities by corporations

primary market

market in which previously issued securities are traded among investors

secondary market

Stock markets are called (BLANK) because stockholders are said to own the common equity of the firm

equity markets

Most corporate debt securities and government debt is traded over the counter, through a network of

banks and securities dealers

Some bonds make “(BLANK)” interest payments tied to the future level of interest rates

floating

Many bonds can be “(BLANK)” (repurchased and retired by the issuing company before the bonds’ stated maturity date

called

Some bonds can be converted into other securities usually the (BLANK) of the issuing company

stock

market for debt securities

fixed-income market

markets for long-term financing

capital markets

market for short-term financing (less than one year)

money market

A firm’s (BLANK) is its long-run financing

capital

Short-term in short-term securities means less than (BLANK) year

one

debt issues with maturities of no more than 270 days

commercial paper

commercial paper is issued in the

money market

Allow investors to bet on almost anything other than stocks

prediction markets

traded over the counter through a network of the largest international banks

foreign exchange markets

You can buy or sell corn, wheat, cotton, fuel oil, natural gas, copper, silver, platinum, and so on.

Commodities market

securities whose payoffs depend on the prices of other securities or commodities

derivatives

an organization that raises money from investors and provides financing for individuals, corporations, or other organizations

financial intermediary

an investment company that pools the savings of many investors and invests in a portfolio of securities

mutual fund

offer investors low-cost diversification and professional management

mutual funds

In exchange for their services trying to beat the market, mutual fund managers charge a

management fee

mutual funds are not corporations but investment companies that pay no

tax

a type of mutual fund that stands ready to issue shares to new investors in the fund and to buy back existing shares when its shareholders decide to cash out.

open-end fund

a type of mutual fund that has a fixed number of shares traded on an exchange that you must buy from another stockholder in the fund

closed-end fund

private investment fund that pursues complex, high-risk investment strategies

hedge fund

hedge funds follow (BLANK) investment strategies and have high (BLANK) to attract talented managers

high-risk, compensation packages

Short-sellers profit when prices

fall

hedge funds that specialize in the securities of distressed corporations

vulture funds

hedge funds manage (BLANK) money than mutual funds

less

A 401(k) is a type of

defined-contribution plan

A retirement savings plan set up by the firm in the name of an employee

401(k) plan

In a (BLANK) a percentage of the employee’s monthly paycheck is contributed to an investment account

401(k) plan

A fund set up, funded, and managed by the employer to provide the assets necessary to pay promised retirement benefits to employees

pension funds

More commonly found in unionized and municipal sectors

pension funds

A pension fund is a type of

defined-benefit plan

The retirement benefits in pension plans are set by a formula that considers

average salary and years of service

In defined benefit plans the (BLANK) is the one providing the assets necessary to pay the promised benefits

employer

Contributions to defined contribution and benefit plans are (BLANK) and investment returns inside the plan are not taxed until cash is finally (BLANK)

tax-deductible, withdrawn

A bank, insurance company, or similar financial intermediary

financial institution

not only invest in securities but also lend money directly to individuals, businesses, or other organizations.

financial institutions

Banks that accept deposits and provide financing mostly to businesses are called

commercial banks

accept deposits and lend mostly to individuals, for example, as mortgage loans to home buyers.

Savings banks and savings & loans (S&Ls) banks

advise and assist companies in obtaining finance

investment banks

investment banks (BLANK) stock offerings by purchasing the new shares from the issuing company at a negotiated price and reselling the shares to investors

underwrite

also advise on takeovers, mergers, and acquisitions.

investment banks

They offer investment advice and manage investment portfolios for individual and institutional investors.

investment banks

They run trading desks for foreign exchange, commodities, bonds, options, and other derivatives.

investment banks

can invest their own money in start-ups and other ventures

investment banks

Insurance companies are more important than banks for the (BLANK) financing of business

long-term

They are massive investors in corporate stocks and bonds, and they often make long-term loans directly to corporations.

insurance companies

Suppose a company needs a loan of $2.5 million for nine years, not nine months. It could issue a bond directly to investors, or it could negotiate a nine-year loan with an

insurance company

Investments banks are sometimes called

merchant banks

Investment banks do not take deposits and do not lend money to businesses or individuals, except as (BLANK) made as temporary financing for takeovers or other transactions.

bridge loans

Financial markets and and intermediaries also transport cash across (BLANK) through savings accounts, pension funds, etc.

time

Lenders transport money (BLANK) in time, borrowers transport it (BLANK) in time

forward, back

Financial markets and intermediaries allow investors and businesses to reduce and reallocate (BLANK)

risk

you can buy (BLANK) that invest in all the stocks in the popular market indexes

index funds

tracks the performance of the largest U.S. stocks

S&P 500

investors are mostly concerns with (BLANK), not the specific risks of individual companies

market risk

portfolios of stocks that can be bought or sold in a single trade

exchange-traded funds (ETFs)

For insurance companies with hurricanes and earthquakes potential loses are so great that property insurance companies buy (BLANK) against such catastrophes

reinsurance