Finc412 Exam Review

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Exam Review
Chapter1
* Financial institution, intermediaries, central bank, bank, what a security is? Financial instrument that allows the holder to get cash flow… primary/secondary market * Security- aka financial instrument – a claim to the issuer’s future income or assets. Bond – debt security. * Financial intermediary – institutions, such as commercial banks, savings and loan associations, mutual savings banks, credit unions, insurance companies, mutual funds, pension funds, and finance companies * Central bank – most important financial institution in the financial system – government agency responsible for the conduct of monetary policy – in USA: Federal Reserve System. Monetary policy involves the management of interest rates and the quantity of money. Monetary policy affects interest rates, inflation, and business cycles, all which have major impact on financial markets and institutions. Chapter2

* Indirect finance – borrower and the people with excess cash, never deal with one another, borrower deals w financial intermediary and so does the lender. * Intermediaries can efficiently allocate capital due to economy of scale, size, quantity. * Brokers and dealers. Broker goes out and buys or sells securities for u, makes money by charging you fees. dealer buys them for their own accounts, they have to have appreciation in the market for them to make money. * Liquidity

* Exchange – NYSE, over the counter market
* Money market – less than a year / capital market – greater than a year * Eurodollar
* Financial intermediation – process of financial companies moving the companies from the ppl who have it to the ppl who need it. Bank, credit union, etc. * Transaction cost – lowered because of economies of scale, risk share, diversification * Asymmetric information – lenders don’t have all info they need * Adverse selection – people who need money the most are the first in line to borrow * Moral hazard

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