Financial Markets and Institutions (2-downloads)

security.

security:

A claim on the borrower’s future income

that is sold by the borrower to the lender. Also

called a financial instrument. 2

seed investing:

Investment by a venture capital

firm in a company before it has a real product or

is even clearly organized as a company. 562

Separate Trading of Registered Interest and

Principal Securities (STRIPS): 

Securities that

have their periodic interest payments separated

from the final maturity payment and the two

cash flows are sold to different investors. 283

shadow banking system:

A system in which bank

lending is replaced by lending via the securities

market. 174, 457

share draft account:

Accounts at credit unions that

are similar to checking accounts at banks. 174

shelf registration:

An arrangement with the Securi-

ties and Exchange Commission that allows a sin-

gle registration document to be filed that

permits multiple securities issues. 457

short position:

A contractual obligation to deliver

an underlying financial instrument. 590

short sale:

An arrangement with a broker to borrow

and sell securities. The borrowed securities are

replaced with securities purchased later. Short

sales let investors earn profits from falling secu-

rities prices. 131

short-term:

With reference to a debt instrument,

having a maturity of one year or less. 18

simple loan:

A credit market instrument providing

the borrower with an amount of funds that must

be repaid to the lender at the maturity date

along with an additional payment (interest). 37

sinking fund:

Fund created by a provision in many

bond contracts that requires the issuer to set

aside each year a portion of the final maturity

payment so that investors can be certain that

the funds will be available at maturity. 289

smart card:

A more sophisticated stored-value card

that contains its own computer chip so that it

can be loaded with digital cash from the owner’s

bank account whenever needed. 462

special drawing rights (SDRs):

A paper

substitute for gold issued by the International

Monetary Fund that functions as international

reserves. 182

speculative attack:

A situation in which speculators

engage in massive sales of a currency. 182

spinning:

When an investment bank allocates hot,

but underpriced, initial public offerings (IPOs),

shares of newly issued stock, to executives of

other companies in return for their companies’

future business with the investment banks. 156

G-14

Glossary

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spot exchange rate:

The exchange rate for the

immediate (two-day) transaction. 346

spot rate:

The interest rate at a given moment. 110

spot transaction:

The immediate exchange of

bank deposits denominated in different

currencies. 346

standard deviation:

A statistical indicator of an

asset’s risk. 66

standing lending facility:

A lending facility in

which healthy banks are allowed to borrow all

they want from a central bank. 226

state banks:

Banks chartered by the states. 456

state-owned banks:

Banks that are owned by

governments. 153

sterilized foreign exchange intervention:

A foreign

exchange intervention with an offsetting open

market operation that leaves the monetary base

unchanged. 377

stock:

A security that is a claim on the earnings

and assets of a corporation. 3

stock company:

An insurance company that issues

stock and has the objective of making a profit for

its shareholders. 517

stock market risk:

The risk associated with fluctua-

tions in stock prices. 603

stock option:

An option on an individual stock. 606

stop loss order:

An order placed with a broker to

buy or sell when a certain price is reached; it is

designed to limit an investor’s loss on a security

position. 553

stress testing:

Calculating losses under dire

scenarios. 435

strike price:

See exercise price.

structure credit products:

Securities that are

derived from cash flows of underlying assets and

are tailored to have particular risk characteris-

tics that appeal to investors with different

preferences. 171

subprime loans:

Loans made to borrowers who do

not qualify for loans at the usual rate of inter-

est due to poor credit rating or too large of a

loan. 338

subprime mortgages:

Mortgage loans made to bor-

rowers who do not qualify for loans at the usual

rate of interest due to a poor credit history. 171

superregional banks:

Bank holding companies simi-

lar in size to money center banks whose head-

quarters are not based in one of the money center

cities (New York, Chicago, San Francisco). 476

supply curve:

A curve depicting the relationship

between quantity supplied and price when all

other economic variables are held constant. 69

swap:

A financial contract that obligates one party

to exchange (swap) a set of payments it owns for

a set of payments owned by another party. 613

sweep account:

An arrangement in which any

balances above a certain amount in a corpora-

tion’s checking account at the end of a busi-

ness day are “swept out” of the account and

invested in overnight repos that pay the corpo-

ration interest. 466

syndicate:

A group of investment banks that come

together for the purpose of issuing a security.

The syndicate spreads the risk of the issue

among the members. Each participant attempts

to market the security and shares in losses. 547

systemic:

Financial firms who pose a risk to the

overall financial system because their failure

would cause widespread damage. 448

T-account:

A simplified balance sheet with lines in

the form of a T that lists only the changes that

occur in a balance sheet starting from some ini-

tial balance sheet position. 403

target financing rate:

The European Central Bank’s

target for the overnight cash rate, the interest

rate for very-short-term interbank loans in the

euro area. 230

tariffs:

Taxes on imported goods. 351

term security:

A security with a specified maturity

date. 267

term structure of interest rates:

The relationship

among interest rates on bonds with different

terms to maturity. 89

theory of efficient capital markets:

The theory

that prices of securities in financial markets fully

reflect all available information. 117

theory of purchasing power parity (PPP):

The the-

ory that exchange rates between any two cur-

rencies will adjust to reflect changes in the price

levels of the two countries. 349

thrift institutions (thrifts):

Savings and loan asso-

ciations, mutual savings banks, and credit

unions. 28

time-inconsistency problem:

The problem that

occurs when monetary policy makers conduct

monetary policy in a discretionary way and

pursue expansionary policies that are attrac-

tive in the short run but lead to bad long-run

outcomes. 232

Glossary

G-15

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tombstone:

A large notice placed in financial

newspapers announcing that a security will be

offered for sale by an underwriter or group of

underwriters. 547

trade association:

A group of credit unions orga-

nized to provide a variety of services to a large

number of credit unions. 

trade balance:

The difference between merchan-

dise exports and imports. 379

transaction costs:

The time and money spent try-

ing to exchange financial assets, goods, or

services. 22

Treasury bills (T-bills):

Securities sold by the federal

government with initial maturities of less than

one year. They are often considered the lowest-

risk security available. 640

underfunded:

Describing a pension plan in which

the contributions and their earnings are insuffi-

cient to pay out the defined benefits when they

come due. 532

undersubscribed:

Having received fewer offers to

buy than there are securities available for sale. 549

underwriters:

Investment banks that guarantee

prices on securities to corporations and then sell

the securities to the public. 517

underwriting:

Guaranteeing prices on securities to

corporations and then selling the securities to

the public. 18

unexploited profit opportunity:

A situation in

which an investor can earn a higher-than-normal

return. 119

unsecured debt:

Debt not guaranteed by

collateral. 137

unsterilized foreign exchange intervention:

A for-

eign exchange intervention in which a central

bank allows the purchase or sale of domestic

currency to affect the monetary base. 376

U.S. Central Credit Union:

A central bank for

credit unions that was organized in 1974 and

provides banking services to the state central

credit unions. 

usury:

Charging an excessive or inordinate interest

rate on a loan. 

value at risk (VaR) calculations:

Measurements of

the size of the loss on a trading portfolio that

might happen, say 1% of the time, over a partic-

ular period such as two weeks. 435

vault cash:

Currency that is physically held by

banks and stored in vaults overnight. 401

venture capital firm:

A financial intermediary

that pools the resources of its partners and

uses the funds to help entrepreneurs start up

new businesses. 147

virtual bank:

A bank that has no building but rather

exists only in cyberspace. 460

wealth:

All resources owned by an individual,

including all assets. 64

wholesale market:

Market where extremely large

transactions occur, as for money market funds or

foreign currency. 255

World Bank:

The International Bank for

Reconstruction and Development, an interna-

tional organization that provides long-term loans

to assist developing countries in building dams,

roads, and other physical capital that would con-

tribute to their economic development. 381

World Trade Organization (WTO):

The organiza-

tion that monitors rules for the conduct of trade

between countries (tariffs and quotas). 381

yield curve:

A plot of the interest rates for partic-

ular types of bonds with different terms to

maturity. 96

yield to maturity:

The interest rate that equates

the present value of payments received from

a credit market instrument with its value

today. 40

zero-coupon bond:

See discount bond. 40

zero-coupon securities:

See Separate Trading of