Foundations of the Financial System

Flashcards covering the foundational concepts of financial systems based on the Unit 1 lecture notes.

__________ is a classic market failure that happens before a deal is signed due to asymmetric information, attracting the exact people you want to avoid.

Adverse Selection

Asset pricing shrinks future value to a present-day number to account for two realities: the time you have to wait and the __________ that things might go wrong.

absolute uncertainty

The root cause of almost all drama in financial markets is __________, which occurs when one side of the table knows a secret that the other side does not.

Asymmetric Information

The field of __________ injects psychology into asset pricing, examining cognitive biases, herd mentalities, fear, and overconfidence.

Behavioral Finance

Financial markets allow for __________, such as using a bank or a Swiss Pillar $3a$ retirement account to ensure you have purchasing power during retirement.

Consumption Smoothing

While Asset Pricing looks at the investor, __________ manages money from the builder's perspective, focusing on capital budgeting and capital structure.

Corporate Finance

According to the __________ level of the Efficient Market Hypothesis, technical analysis is a waste of time because prices already reflect all past trading data.

Weak-Form Efficiency

According to __________ efficiency, prices instantly adjust to all publicly available information, meaning active managers cannot consistently beat the market via fundamental analysis.

Semi-Strong Form

The __________ is an unresolved puzzle in finance where stocks significantly outperform safe government bonds beyond what standard mathematical models of risk aversion can justify.

Equity Premium Puzzle

A __________ is described as the ultimate societal coordination machine that allows for the trading of resources across time, space, and parties.

Financial System

Unlike physical assets, __________ are legal claims on future cash flows generated by physical things, such as debt, equity, or derivatives.

Financial Assets

Banks, brokers, and exchanges serve as __________, acting as matchmakers to bridge the gap between savers and borrowers.

Financial Intermediaries

The study of the actual concrete mechanics of a stock exchange, including order books and the bid-ask price gap, is called __________.

Market Microstructure

The __________ states that under perfect conditions with zero taxes and no bankruptcy threat, the total value of the firm is the same regardless of its capital structure.

Modigliani-Miller Theorem

In Switzerland, __________ is controlled by the Swiss National Bank (SNB) to maintain price stability by tweaking interest rates or bank reserve requirements.

Monetary Policy

Unlike adverse selection, __________ happens after a deal is inked because an agent feels protected from negative consequences, such as in the case of 'Too Big To Fail' bank bailouts.

Moral Hazard

In Switzerland, the volume-weighted average rate of overnight secured short-term loans is called __________.

SARON

The SNB purposefully pushed SARON below $0\%$ for several years to prevent the __________ from becoming too strong and harming Swiss industry.

Swiss Franc

Investing in an Exchange-Traded Fund (ETF) that automatically copies a benchmark index like the SMI is known as __________.

Passive Investing

According to the __________, firms follow a hierarchy for funding: first using internal funds, then debt, and selling new equity only as an absolute last resort.

Pecking Order Theory

The goal of __________ is to assemble a basket of multiple assets that don't move together to wash away unsystematic risk.

Portfolio Theory

When financial securities are born and sold to the public for the first time via an Initial Public Offering (IPO), they are traded on __________ markets.

Primary

A __________ is an ultra-short-term secured loan where a bank sells high-quality securities to another institution and promises to buy them back the next morning.

Repurchase Agreement

The __________ is a dynamic formula that discounts future cash flows based on the state of the economy, factoring in that assets paying out during a crash are more precious.

Stochastic Discount Factor

The __________ theory suggest that executives hunt for a sweet spot by taking on enough debt to harvest tax shields without hitting the point of financial distress.

Trade-off