Overview of the Financial Environment – Key Vocabulary

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A comprehensive set of vocabulary flashcards covering the financial system, its functions, components, markets, and institutions as discussed in the lecture.

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48 Terms

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Financial System

An integrated network of markets, institutions, instruments and services that enables the transfer of funds from savers to borrowers.

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Lender-Savers

Economic units (e.g., households) with surplus funds that supply capital to the financial system.

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Borrower-Spenders

Economic units (e.g., firms, governments) with fund deficits that seek capital through the financial system.

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Direct Finance

Flow of funds straight from lender-savers to borrower-spenders through financial markets without an intermediary.

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Indirect Finance

Flow of funds from savers to borrowers via a financial intermediary such as a bank.

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Financial Intermediary

Institution that channels funds between savers and borrowers while reducing risk and transaction costs.

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Financial Market

Any marketplace in which financial assets (stocks, bonds, etc.) are issued and traded.

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Payments Facilitation

Financial system function that enables smooth, convenient and timely transfer of money worldwide.

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Transfer of Financial Resources

Function whereby surplus funds are allocated to deficit units, allowing investors to earn returns and borrowers to obtain capital.

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Risk Management (Financial System)

Process of redistributing and mitigating unavoidable risks among individuals and firms via financial contracts and markets.

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Financial Information Management

Provision of timely, relevant data that supports decisions by households, businesses and governments.

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Efficient Financial Intermediation

Role of minimizing transaction costs by acting as a low-cost middleman between savers and borrowers.

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Pooling of Resources

Combining many investors’ funds to finance larger projects and diversify risk.

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Money

Anything widely accepted as a medium of exchange, unit of account and store of value.

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Financial Institutions

Businesses engaged in monetary transactions such as deposits, loans, investments and currency exchange.

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Financial Instruments

Tradable monetary contracts—including bonds and stocks—that transfer funds and risk.

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Financial Services

Services that help investors manage assets and obtain risk protection (e.g., advisory, insurance).

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Savings Utilization

Role of financial markets in channeling household and business savings into productive investments.

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Price Determination of Securities

Function of financial markets in setting market prices for stocks, bonds and other instruments.

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Asset Liquidity

Ability to quickly buy or sell financial assets in a marketplace without affecting their price significantly.

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Transaction Cost Reduction

Benefit of financial markets that lower search, information and trading expenses for investors.

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Stock Market

Market where ownership shares of public companies are issued and traded.

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Bond Market

Market in which governments and companies raise funds by issuing debt securities to investors.

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Commodities Market

Marketplace for buying and selling physical goods such as oil, gold, corn and meat.

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Derivative Market

Market for contracts whose value is derived from the price of an underlying asset.

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Debt Market

Segment where fixed-claim securities (e.g., bonds) that pay interest are bought and sold.

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Equity Market

Segment in which stocks and other equity instruments that represent ownership are traded.

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Money Market

Market for short-term (one year or less), low-risk financial instruments.

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Capital Market

Market for medium- to long-term securities used to finance expansion and investment.

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Primary Market

Market where new securities are issued and sold for the first time to raise fresh capital.

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Secondary Market

Market where existing securities are traded among investors after the initial issuance.

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Monetary Flow Control

Function of financial institutions in stabilizing money supply and managing inflation via asset transactions.

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Banking and Financial Services

Savings accounts, checking, loans and other core services offered by financial institutions.

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Insurance Services

Life, health and non-life coverage provided to protect individuals and firms against financial loss.

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Capital Formation Assistance

Provision of external financing that enables businesses to expand their stock of productive assets.

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Investment Advice

Guidance offered by institutions to help clients choose optimal investments in financial markets.

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Financial Brokerage

Intermediation service that matches buyers and sellers of securities for a brokerage fee.

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Resource Flow Facilitation

Smooth transfer of large sums (e.g., for investments or property purchases) enabled by institutions.

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Institutional Risk Management

Pooling of risks among many clients so individual exposure to uncertainty is reduced.

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Commercial Bank

Depository institution that accepts deposits and extends business, personal and mortgage loans.

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Credit Union

Member-owned cooperative that accepts savings and provides loans to its participants.

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Savings and Loan Association

Institution that gathers small savers’ deposits and primarily finances home purchases.

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Mutual Savings Bank

Depository institution owned by its depositors; profits benefit members via better rates or lower fees.

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Insurance Company

Non-depository institution that offers risk protection and invests collected premiums.

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Pension/Provident Fund

Fund that collects periodic contributions and pays retirement benefits to employees.

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Finance Company

Firm that provides consumer and business loans for homes, projects, leasing and real estate.

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Mutual Fund

Institution that pools investors’ money to buy a diversified portfolio of securities.

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Investment Bank

Specialist firm that underwrites securities, arranges IPOs and provides corporate finance services.