Direct Finance
Direct finance is the financial
transaction between the lender and the borrower without using financial
intermediation. The cost of underwriting is removed by selling the securities
directly.
Financial Intermediation
Financial intermediation is a term
that defines the process of what the financial intermediaries do. Financial
intermediaries are the financial institutions that link surplus and deficit. In
other words, they are the serving between lenders and borrowers for raising
funds.
Capital Markets
It is the market where companies
and governments raise funds that have periods longer than one year.
Secondary Markets
It is the market where the
securities are sold and bought after the first issuers’ place. For example,
U.S. Treasury issues bonds and these bonds are sold and bought at stock markets,
which is a secondary market.
Moral Hazard
Moral hazard is a term that is the
encouragement to take risky or reckless action that arises when your losses are
insured by someone else.
Systematic Risk
It is the intrinsic risk of the
entire financial market.
Adverse Selection
It is the term originates when the
buyers and sellers have different information. The results occurred are
dreadful when the two sides have asymmetric information.
Gresham’s Law
Assume that there are two types of
coins; one carries 1 gram gold let say it A and the other carries 1 gram silver
let say it be B. Both A and B has a $100 face value; i.e., both of them have
the same value. But people tend to spend B and save A because A has gold in it,
which makes it more valuable in people’s mind. So the bad money drives out the
good money.
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