Financial Institutions, Instruments & Markets - Vocabulary Flashcards

These vocabulary flashcards cover key terms and definitions from the lecture on financial institutions, instruments, and markets, enabling comprehensive review for the upcoming exam.

Financial System

The network of financial institutions, instruments, and markets that channels funds from savers to users.

Financial Institutions

Companies in the financial sector (e.g., banks, insurers, mutual funds) that collect money and lend or invest it.

Financial Markets

Venues where financial assets such as stocks, bonds, and currencies are bought and sold.

Financial Instruments

Documents—physical or digital—that represent a legal agreement involving money, creating an asset for one party and a liability or equity for another.

Financial Asset

A valuable claim that can be converted to cash and whose value stems from a legal agreement or ownership (e.g., cash, stocks, bonds).

Financial Liability

A contractual obligation to deliver cash or another financial instrument, creating debt for the issuer.

Equity Instrument

A financial document showing ownership in a company and residual claim on its assets after debts are paid.

Debt Instrument

An investment in which money is lent in exchange for fixed returns, usually interest (e.g., bonds).

Cash

Money on hand or in bank accounts; the most liquid financial asset.

Contractual Right to Receive Cash

An agreement giving one party the right to collect cash or another financial asset from another party.

Contractual Right to Exchange Favorably

An agreement allowing one party to trade financial instruments under conditions that benefit them.

Notes Payable

Written promises (promissory notes) to pay a specified amount plus interest at a future date.

Bonds Payable

Long-term debt instruments in which the issuer promises periodic interest and principal repayment to holders.

Ordinary Share (Common Stock)

Equity representing real ownership with voting rights; last in line for assets upon liquidation.

Preference Share (Preferred Stock)

Equity with fixed dividends and priority over common stock in dividends and liquidation, but usually no voting rights.

Treasury Bonds

Long-term debt securities issued by the government; low risk with lower yields.

Treasury Bills

Short-term (≤1 year) government securities sold at a discount and redeemed at face value.

Corporate Bonds

Debt securities issued by publicly listed companies offering higher yields but greater default risk than government bonds.

Promissory Note

A written, unconditional promise to pay a specified amount on demand or at a set time.

Supplier of Funds (Saver)

Individual or entity that provides capital and holds financial assets expecting returns.

User of Funds (Demander)

Individual or entity that needs capital and issues financial liabilities or equity to obtain it.

Private Placement

Sale of securities directly to specific investors rather than the general public.

Public Offering

Sale of securities (stocks or bonds) to the general investing public.

Initial Public Offering (IPO)

A company’s first sale of shares to the public, transitioning from private to publicly traded.

Primary Market

Market where new financial instruments are created and sold for the first time.

Secondary Market

Market where existing financial instruments are traded among investors.

Money Market

Market for short-term (≤1 year), highly liquid, low-risk instruments like T-bills and certificates of deposit.

Capital Market

Market for long-term (>1 year) securities such as stocks and bonds used to finance long-term projects.

Commercial Bank

Depository institution that accepts deposits and extends commercial and personal loans, and buys debt securities.

Insurance Company

Firm collecting premiums to pool risk and investing proceeds until claims are paid.

Pension Fund

Institution that collects employee and employer contributions and invests them for retirement benefits.

Mutual Fund

Investment company pooling money from many investors to buy diversified portfolios managed by professionals.

Investment Bank

Financial institution specializing in underwriting new securities, advising firms, and facilitating large transactions.

Unit Investment Trust Fund (UITF)

Pooled investment vehicle offered by banks, where units represent proportional ownership of the underlying assets.

Credit Union

Member-owned cooperative depository institution providing savings and loan services to its members.

Intermediary

Entity that channels funds from savers to users, reducing information and transaction costs.

Profit Maximization

Goal of selecting alternatives expected to yield the highest monetary return for the firm.

Shareholder Wealth Maximization

Objective of increasing owners’ wealth, measured by the market price of the company’s stock.

Dividend Policy

Firm’s approach to distributing earnings to shareholders; dividends often relate to—but need not match—earnings per share.

High Liquidity

Characteristic of assets or markets that can be quickly converted to cash with minimal price impact.