Fundamentals of Financial Management (Concise 6th Edition)

Chapter 2 Financial Markets and Institutions 51

In this chapter, we provided a brief overview of how capital is allocated and discussed

the! nancial markets, instruments, and institutions used in the allocation process.

We discussed physical location exchanges and electronic markets for common stocks,

stock market reporting, and stock indexes. We demonstrated that security prices are

volatile—investors expect to make money, which they generally do over time; but

losses can be large in any given year. Finally, we discussed the e# ciency of the stock

market and developments in behavioral! nance. After reading this chapter, you

should have a general understanding of the! nancial environment in which busi-

nesses and individuals operate, realize that actual returns are often di" erent from

expected returns, and be able to read stock market quotations from business news-

papers or various Internet sites. You should also recognize that the theory of! nan-

cial markets is a “work in progress,” and much work remains to be done.

KEY TERMS Define each of the following terms:

a. Spot markets; futures markets

b. Money markets; capital markets

c. Primary markets; secondary markets

d. Private markets; public markets

e. Derivatives

f. Investment banks (iBanks); commercial banks; financial services corporations

g. Mutual funds; money market funds

h. Physical location exchanges; over-the-counter (OTC) market; dealer market

i. Closely held corporation; publicly owned corporation

j. Going public; initial public offering (IPO) market

k. Efficient markets hypothesis (EMH)

l. Behavioral finance

How does a cost-efficient capital market help reduce the prices of goods and services?

Describe the different ways in which capital can be transferred from suppliers of capital to

those who are demanding capital.

Is an initial public offering an example of a primary or a secondary market transaction?

Explain.

Indicate whether the following instruments are examples of money market or capital mar-

ket securities.

a. U.S. Treasury bills

b. Long-term corporate bonds

c. Common stocks

SELF!TEST QUESTIONS AND PROBLEMS

"Solutions Appear in Appendix A

SELF!TEST QUESTIONS AND PROBLEMS

"Solutions Appear in Appendix A

ST-1ST-1

QUESTIONSQUESTIONS

2-12-1

2-22-2

2-32-3

2-42-4

T Y I N G I T A L L T O G E T H E R