adverse selection:
decision making that results from the incentive for some people to engage in a transaction that is undesirable to everyone else; the problem exists because of asymmetric information
asymmetric information:
when one party to a transaction has relatively more information than another
brokers:
individuals who bring together a buyer and a seller and assist in the completion of a financial transaction between them
capital market:
the market for financial instruments that mature in more than one year
deposit-taking institutions:
institutions that accept deposits and make loans
externalities:
phenomena whereby individual actions produce costs (or benefits) to other individuals over and above private costs and benefits
financial intermediaries:
institutions that channel funds between borrowers and lenders
four pillars:
the term used to describe the specialized functions of the four different sectors of the Canadian financial system: chartered banks, trusts, insurance companies, and investment dealers; with the passage of the 1992 Bank Act, these divisions are no longer formally in place
intermediaries:
institutions involved in the act of transforming assets and liabilities that results in the creation of new assets and liabilities; also institutions that borrow funds from savers and lend them to borrowers, and that provide financial services
intermediation:
the function of transforming assets or liabilities into other assets or liabilities; this is the principal activity of most financial institutions
money market:
the market for financial assets that mature in one year or less
moral hazard:
the chance that an individual may have an incentive to act in such a way as to put that individual at greater risk; the individual perceives as beneficial a course of action deemed undesirable by another
portfolio:
a collection of financial assets
primary market:
the market for newly issued financial instruments
secondary market:
the market for previously issued financial instruments
securitization:
describes the phenomenon whereby assets that are normally not liqui d, such as mortgages, are made liquid by pooling them and reselling the combined amount as short-term assets; credit card debt as well as other types of assets normally illiquid are also securitized
