MAS 2 REVIEWER: (VALDONE)

Chapter 1: Financial markets structure and role in the financial system

Definition and term:
financial system - plays the key role in the economy by stimulating economic growth,
influencing economic performance of the actors, affecting economic welfare.
financial instruments - are intangible assets, which are expected to provide future benefits in
the form of a claim to future cash
Financial intermediary - is a special financial entity, which performs the role of efficient
allocation of funds, when there are conditions that make it difficult for lenders or investors of
funds to deal directly with borrowers of funds in financial markets
financial market - is a market where financial instruments are exchanged or traded
Price discovery - function means that transactions between buyers and sellers of financial
instruments in a financial market determine the price of the traded asset
Liquidity - function provides an opportunity for investors to sell a financial instrument, since it
is referred to as a measure of the ability to sell an asset at its fair market value at any time.
Reduction of transaction cost - is performed, when financial market participants are charged
and/or bear the costs of trading a financial instrument
Asset specificity - is related to the way transaction is organized and executed. It is lower when
an asset can be easily put to alternative use, can be deployed for different tasks without
significant costs
Frequency of occurrence - plays an important role in determining if a transaction should take
place within the market or within the firm
Uncertainty - which has external sources when events change beyond control of the contracting
parties and depends on opportunistic behavior of the contracting parties
Explicit costs - include expenses that may be needed to advertise one’s intention to sell or
purchase a financial instrument
Implicit costs - include the value of time spent in locating counterparty to the transaction.
Information costs - are associated with assessing a financial instrument’s investment attributes
Costs of contracting and monitoring - are related to the costs necessary to resolve information
asymmetry problems
Costs of incentive problems - between buyers and sellers arise, when there are conflicts of
interest between the two parties, having different incentives for the transactions involving
financial assets.
Brokers - who act as agents for public investors and who are motivated by the remuneration
received typically in the form of commission fees
Public investors - who ultimately own the securities and who are motivated by the returns from
holding the securities
Dealers - who do trade on their own account but whose primary motive is to profit from trading
rather than from holding securities
Debt instrument - also referred to as an instrument of indebtedness
Equity instrument - specifies that the issuer pays the investor an amount based on earnings
Common stock - is an example of equity instruments some financial instruments due to their
characteristics can be viewed as a mix of debt and equity
Convertible bond - which allows the investor to convert debt into equity under certain
circumstances
Internal market - also called the national market
Domestic market - is where issuers domiciled in the country issue securities and where those
securities are subsequently traded
foreign market - is where securities are sold and traded outside the country of issuers
External market - is the market where securities with the following two distinguishing features
are trading at issuance they are offered simultaneously to investors in a number of countries and
they are issued outside the jurisdiction of any single country
Euromarket -despite the fact that this market is not limited to Europe
Money market - is the sector of the financial market that includes financial instruments that
have a maturity or redemption date that is one year or less at the time of issuance. These are
mainly wholesale markets
Capital market - is the sector of the financial market where long-term financial instruments
issued by corporations and governments trade
Cash market - also referred to as the spot market, is the market for the immediate purchase and
sale of a financial instrument
Underlying asset - is a stock, a bond, a financial index, an interest rate, a currency, or a
commodity
Derivative instruments – these contracts the price of such contracts derive their value from the
value of the underlying assets
Derivatives market – called derivative instruments traded in market
Primary market – financial instruments sold in the first issued
Secondary market - is such in which financial instruments are resold among investors
Stock exchanges - are central trading locations where financial instruments are traded
OTC market - is generally where unlisted financial instruments are traded
Financial market regulation - is aimed to ensure the fair treatment of participants. Many
regulations have been enacted in response to fraudulent practices and aims of regulation is to
ensure business disclosure of accurate information for investment decision making