Introduction to Financial Markets & Institutions – Vocabulary Review

A comprehensive set of vocabulary flashcards covering key terms, instruments, risks, markets, and institutions discussed in the lecture notes on financial markets and institutions.

Financial Market

Any venue or system that enables buyers and sellers to trade financial instruments, connecting capital seekers with investors.

Bond

A debt‐based security in which the investor lends money to the issuer in exchange for periodic interest and repayment at maturity.

Stock

An equity security representing fractional ownership in a corporation, entitling holders to a share of profits.

Currency Pair

Quotation of two different currencies, showing the value of one relative to the other in the foreign exchange market.

Derivative

A financial contract whose value depends on an underlying asset, index, or benchmark.

Futures Contract

Standardized agreement to buy or sell an asset at a predetermined price on a specific future date.

Options Contract

Gives the holder the right, but not the obligation, to buy (call) or sell (put) an asset at a set price within a specified period.

Swap

A derivative in which two parties exchange cash flows or other financial instruments.

Forward Contract

Customized agreement between two parties to buy or sell an asset at a specified price on a future date.

Primary Market

Market where new securities are issued and sold directly to investors to raise fresh capital.

Secondary Market

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

Money Market

Market for debt securities with maturities of one year or less, used for short-term funding and liquidity management.

Capital Market

Market for equity and long-term debt instruments with maturities greater than one year.

Foreign Exchange (Forex) Market

Global over-the-counter marketplace that determines exchange rates and trades world currencies 24/5.

Derivative Market

Market where derivative instruments such as futures, options, and swaps are bought and sold.

Initial Public Offering (IPO)

The first sale of a company’s shares to the public in the primary market.

Rights Offering

Issue of new shares to existing shareholders at a discounted price, proportional to holdings.

Private Placement

Sale of securities directly to a select group of investors rather than to the public.

Preferential Allotment

Issuance of shares to specific investors at a special price, often below market value.

Treasury Bill

Short-term government debt security with maturities up to one year, sold at a discount.

Commercial Paper

Unsecured short-term promissory note issued by corporations to meet immediate funding needs.

Repurchase Agreement (Repo)

Short-term loan where one party sells securities with an agreement to repurchase them at a higher price.

Financial Institution (FI)

Organization that channels funds between savers and borrowers, providing financial services.

Depository Institution

FI that accepts deposits and extends loans, e.g., commercial banks, savings banks, credit unions.

Non-Depository Institution

FI that does not accept deposits but provides financial services, e.g., insurance companies, mutual funds.

Commercial Bank

Depository institution whose primary assets are loans and primary liabilities are deposits.

Credit Union

Member-owned depository institution offering savings and loans to its members.

Insurance Company

FI that protects individuals or firms against financial loss from specified risks in exchange for premiums.

Mutual Fund

Investment vehicle that pools money from investors to buy diversified portfolios of securities.

Asset Transformer

FI that issues claims to savers and invests in primary securities, altering risk, maturity, or denomination.

Delegated Monitor

FI acting on behalf of many small investors to screen and monitor borrowers, reducing monitoring costs.

Liquidity

Ease with which an asset can be converted to cash without significant loss in value.

Price Risk

Risk that the selling price of an asset will be lower than its purchase price.

Credit Risk

Risk that borrowers will fail to make promised payments on loans or bonds.

Liquidity Risk

Risk that an FI cannot meet sudden withdrawal demands without costly asset sales.

Interest Rate Risk

Risk arising from mismatched maturities of assets and liabilities when interest rates fluctuate.

Market Risk

Risk of losses from changes in market prices, interest rates, or exchange rates during active trading.

Off-Balance-Sheet (OBS) Risk

Risk from contingent assets or liabilities not recorded on the balance sheet, such as guarantees or derivatives.

Foreign Exchange Risk

Risk that currency value changes will affect assets and liabilities denominated in foreign currencies.

Country (Sovereign) Risk

Risk that political or economic events in a foreign country will interrupt repayments on investments.

Technology Risk

Risk that new technology investments fail to deliver expected benefits.

Operational Risk

Risk of loss from inadequate or failed internal processes, people, systems, or external events.

Insolvency Risk

Risk that an FI’s capital becomes insufficient to cover a sudden decline in asset value.

Securities and Exchange Commission (SEC)

U.S. federal agency regulating securities markets and protecting investors.

Securities Exchange Act of 1934

U.S. law governing secondary trading of securities to promote transparency and fairness.

Bangko Sentral ng Pilipinas (BSP)

Philippine central bank that implements monetary policy and supervises banks and NBFIs.

Insurance Commission (IC)

Philippine regulator overseeing insurance companies, pre-need firms, and HMOs.

Philippine Deposit Insurance Corporation (PDIC)

Agency providing deposit insurance up to PHP 500,000 per depositor per bank.

Maturity Intermediation

FI service of bridging differing maturity preferences between savers (short) and borrowers (long).

Denomination Intermediation

FI service that allows small investors to purchase shares in large-denomination securities.