What does the asymmetric information mean: adverse selection and moral hazard?

Types of financial markets (Money and capital, Debt and equity, Primary and secondary, exchanges and over the counter).

a) Debt Market

Short-Term (maturity < 1 year)

Medium-Term (1< maturity < 10 years)

Long-Term (maturity > 10 years)

b) Equity Market

- Common/Preferred Stock trading

c) Foreign exchange market

- trading in international currencies

d) Financial derivatives markets

-Trading in futures, forwards, options and swap contracts

e) Money Market -the short-term debt instruments with the maturity of less than 1 year

f) Capital Markets -the long-term debt instruments with the maturity of more than 1 year and equity instruments

g) Primary Market - New security issues sold to initial buyers

i.e. Investment Banks underwrites securities

h) Secondary Market -Securities previously issued are bought and sold

i) Exchanges- Trades conducted in central locations

(e.g., New York Stock Exchange, KASE, LSE)

j) Over-the-Counter Market- Dealers and Brokers at different locations buy and sell securities

K) International Bond Market

1. Foreign bonds

– sold in a foreign country and denominated in that country’s currency

2. Eurobonds

- denominated in a currency other than that of the country in which it is sold

l) Eurocurrency – deposited in banks outside of home country (eurodollars)

m) World Stock Markets - the U.S. stock market is no longer the largest: the Japan's one is the largest

4. Difference between dealers and brokers;

Brokers – agents of investors who match buyers with sellers of securities

Dealers – link buyers and sellers by buying and selling securities at stated prices

5) Foreign bonds, Eurobonds and Eurocurrencies (definitions);

International Bond Market

2. Foreign bonds

– sold in a foreign country and denominated in that country’s currency

2. Eurobonds

- denominated in a currency other than that of the country in which it is sold

Eurocurrency – deposited in banks outside of home country (eurodollars)

What does the asymmetric information mean: adverse selection and moral hazard?

Asymmetric information mean: When the lender and the borrower have a different amounts of information.

Adverse selection: potential borrowers who are the most likely to default seek a loan actively, it occurs before transaction.

Moral hazard: Borrower engages in activities that make the loan not be repaid.

7) Definition of 4 debt instruments: simple loans, discount bonds, coupon bonds, fixed payment loans;

Simple Loans require payment of one amount, which equals the loan principal plus the interest.

Fixed-Payment Loans are loans where the loan principal and interest are repaid in several payments, often monthly, in equal dollar amounts over the loan term.

(I.E)- auto loans and home mortgages are frequently of the fixed-payment type.

Coupon Bond- owners of the bond pay a fixed amount until maturity date, face value is repaid

Discount Bond- is a bought a price below its face value, Face Value is repaid at the maturity.