Chapter 2: The Financial System

Who founded Vanguard and is known as the father of passive investing?

John Bogle

What is index investing?

A method that allows investors to purchase mutual funds that track a major market index.

What is the main focus of financial markets?

Facilitating the transfer of funds from savers to borrowers.

What is direct finance?

Financing where borrowers obtain funds directly from the financial market without a third party.

What is indirect finance?

Financing where borrowers obtain funds through intermediaries, such as banks.

What role do financial intermediaries play in financial markets?

They connect borrowers and lenders, facilitating transactions and providing liquidity.

What is the money market?

A financial market for trading short-term debt investments with maturities under one year.

What is the capital market?

A market for trading medium- to long-term securities with maturities exceeding one year.

How is a stock defined in financial markets?

A security that represents ownership shares of a corporation.

What is a bond?

A debt contract where the borrower agrees to pay back the loan amount with interest.

What is an initial public offering (IPO)?

The first sale of shares of a company to the public.

What are municipal bonds?

Debt securities issued by government entities to fund capital projects, often tax-exempt.

What is the efficient market hypothesis?

The theory that asset prices reflect all available information, making it impossible to consistently 'beat the market.'

What is behavioral finance?

The study of the effects of psychology on investors and financial markets.

What is dollar-cost averaging?

Investing a fixed amount regularly regardless of market conditions.

What is active investing?

Choosing investments to outperform the market through careful selection.

What is passive investing?

Building wealth gradually by purchasing securities with the intent to hold long-term.

What is a Treasury bill (T-Bill)?

A short-term U.S. government debt obligation with maturities of one year or less.

What are federal funds?

Excess reserves that commercial banks deposit at Federal Reserve Banks used for overnight loans.

What is a finance company?

An entity that lends money to individuals and small businesses, earning income from interest.

What is a merger?

The combination of two businesses into one.