Financial Institutions and Markets - Lecture 1

Vocabulary flashcards covering core concepts, market definitions, and key theories from Lecture 1 of Financial Institutions and Markets.

Information Asymmetry

A condition where one party in a financial transaction possesses better information than another, creating the need for financial reporting and analysis.

Adverse Selection

A market phenomenon where higher-risk borrowers or applicants seek financing more aggressively, creating the need for credit scores and rating agencies.

Moral Hazard

The risk that a borrower or insured party changes behavior post-agreement because their actions cannot be perfectly observed, necessitating monitoring and guarantees.

Pecking Order Theory

A financial hierarchy theory stating that firms prefer internal funds first, debt financing second, and equity issuance last when funding operations or investments.

Financial Disintermediation

The trend of bypassing financial middlemen such as banks and exchanges to lower borrowing costs and increase returns, heavily driven by technological innovations in FinTech.

Primary Market

The sector of financial markets where investment banks facilitate the initial offering of new securities and financial products.

Secondary Market

The sector of financial markets where existing securities are actively traded among investors across exchanges.

Money Market

A segment of the financial market dealing in short-term debt instruments, including Treasury Bills (T-Bills), Certificates of Deposit (CDs), and Commercial Paper.

Capital Market

A segment of the financial market designated for long-term financing, encompassing bond markets, stock markets, and derivatives markets.

Systematic Lenders

Households, which act as the largest source of external capital within the broader financial ecosystem.

Systematic Borrowers

Corporations, which function as the primary and largest users of external capital in the financial system.

Financial Intermediation Structure

The system mapping how capital flows between households, corporations, intermediaries, institutional investors, and financial markets.