Financial Institution
an intermediary that channels the savings of individuals, businesses, and governments into loans or investments.
Commercial Banks
Institutions that assist companies in raising capital, advise firms on major transactions such as mergers or financial restructurings, and engage in trading and market making activities
Glass-Steagall Act
An act of Congress in 1933 that created the federal deposit insurance program and separated the activities of commerical and investment banks.
Shadow banking system
a group of institutions that engage in lending activities much like traditional banks, but do not accept deposits and therefore are not subject to the same regulations as traditional banks.
Financial markets
Forums in which suppliers of funds and demanders of funds can transact business directly.
Private placement
The sale of a new security directly to an investor or group of investors.
Public Offering
The sale of either bonds or stocks to the general public.
Primary Market
financial market in which securities are initially issued; the only market in which the issuer is directly involved in the transaction
Secondary Market
financial market in which preowned securities (those that are not new issues) are traded
Money market
a financial relationship created between suppliers and demanders of short-term funds
Marketable Securities
Short-term debt instruments, such as U.S. Treasury bills, commercial paper, and negotiable certificates of deposit issued by government, business, and financial institutions, respectively
Eurocurrency market
international equivalent of the domestic money market
Capital market
a market that enables suppliers and demanders of long-term funds to make transactions
Bond
long-term debt instrument used by business and government to raise large sums of money, generally from diverse group of lenders
Preferred stock
a special form of ownership having a fixed periodic dividend that must be paid prior to payment of any dividends to common stockholders
Broker market
The securities exchanges on which the two sides of a transaction, the buyer and seller, are brought together to trade securities.
Securities exchanges
organizations that provide the marketplace in which firms can raise funds through the sale of new securities and purchasers can resell securities
Dealer market
the market in which the buyer and seller are not brought together directly but instead have their orders executed by securities dealers that "make markets" in the given security
Market makers
securities dealers who "make markets" by offering to buy or sell certain securities at stated prices
NASDAQ Market
an all-electronic trading platform used to execute securities trades
Over-the-counter (OTC) market
market where smaller, unlisted securities are traded
Bid price
the highest price offered to purchase a security
Ask price
the lowest price at which a security is offered for sale
Eurobond market
The market in which corporations and governments typically issue bonds denominated in dollars and sell them to investors located outside the United States.
Foreign bond
a bond that is issued by a foreign corporation or government and is denominated in the investor's home currency and sold in the investor's home market
International equity market
a market that allows corporations to sell blocks of shares to investors in a number of different countries simultaneously
Efficient market
A market that establishes correct prices for the securities that firms sell and allocates funds to their most productive uses.
Securitization
the process of pooling mortgages or other types of loans and then selling claims or securities against that pool in the secondary market
Mortgage-backed securities
securities that represent claims on the cash flows generated by a pool of mortgages
Federal Deposit Insurance Corporation (FDIC)
an agency created by the Glass-Steagall Act that provides insurance for deposits at banks and monitors banks to ensure their safety and soundness
Gramm-Leach-Bliley Act
An act that allows business combinations (that is, mergers) between commercial banks, investment banks, and insurance companies and thus permits these institutions to compete in markets that prior regulations prohibited them from entering.
Securities Act of 1933
An act that regulates the sale of securities to the public via the primary market.
Securities Exchange Act of 1934
An act that regulates the trading of securities such as stocks and bonds in the secondary market
Securities and Exchange Commission (SEC)
the primary government agency responsible for enforcing federal securities laws
Ordinary income
income earned through the sale of a firm's goods or services
Marginal tax rate
the rate at which additional income is taxed
Average tax rate
A firm's taxes divided by its taxable income
Double Taxation
situation that occurs when after-tax corporate earnings are distributed as cash dividends to stockholders, who then must pay personal taxes on the dividend amount
Capital Gain
the amount by which the sale price of an asset exceeds the asset's purchase price