Final Exam Cheat Sheet

Ch.1 financial intermediation results from economies of scale and the specialization of financial transactions. (banks, inv. companies [mutual & pension funds], insurance companies, credit unions, brokerage firms, investment banks). Inv. banks assist firms in raising capital, create the market for innovative new securities that meet the risk and return demand (CMOs, collateralized mortgage obligations – derivative security that separates the cash flows of a mortgage pool into different classes with different maturities and risks). risk and return are the most important characteristics of financial assets. Another is tax. (high tax-bracket investors would, other things equal, would prefer tax-exempt securities [municipal bonds]). brokered markets (when a bank seeks out investors to purchase an issue directly from the issuing firm, it is acting as a broker) and dealer markets (when an inv. bank purchased and sold a security issue, it is acting as a dealer – profit is the bid-ask spread [ask price is investors’ purchase price & bid price is investors’ sale price, with ask price greater than the bid price]). Both broker and dealer markets require a financial intermediary. auction market is a more advanced market in which all buyers and sellers arrive at mutually agreeable prices (popularity of internet auction market). primary markets (where a security is first sold to investors [IPOs, initial public offerings]) and secondary markets (where existing securities are traded among investors [New York Stock Exchange]). trends: 1)globalization (euro); 2) securitization (CMOs); 3) financial engineering (creation of new securities); 4) faster & more easily accessible information.

Ch.2 money market is the market for short-term securities (T-bills, CDs, Commercial Paper, Bankers’ Acceptances, Eurodollars [$ deposit outside U.S.], Repos [repurchase agreement], Federal Funds, & Call Money. low risk (due to their short lives) and high liquidity (due to