1. Financial Assets Flashcards
What is asset allocation?
Asset allocation involves deciding how much money to allocate to broad classes of assets.
What are money markets composed of?
Money markets are composed of short-term, marketable, liquid, low-risk debt securities.
What are capital markets?
Capital markets are financial markets where long-term debt or equity securities are bought and sold. These markets allow companies, governments, and other organizations to raise funds for their projects and operations. Main markets: primary and secondary.
What is a Treasury Bill (T-bill)?
A Treasury Bill is a government-issued debt security with a short-term maturity, sold to raise money.
What is a Certificate of Deposit (CD)?
A CD is a bank deposit where interest and principal are paid at maturity, and it cannot be withdrawn on demand.
What is commercial paper?
Commercial paper is short-term unsecured debt notes issued by large, well-known companies.
What is a banker’s acceptance?
A banker’s acceptance is an order to a bank by a customer to pay a sum of money at a future date.
What are Eurodollars?
Eurodollars are dollar-denominated deposits at foreign banks or branches of American banks.
What is a repurchase agreement?
A repurchase agreement is the short-term sale of securities with an agreement to repurchase them at a slightly higher price.
What is the federal funds rate?
The federal funds rate is the overnight rate set by the Federal Reserve.
What are Treasury notes and bonds?
Treasury notes have maturities up to 10 years, while bonds have maturities from 10 to 30 years.
What are municipal bonds?
Municipal bonds are tax-exempt bonds issued by state and local governments.
What are corporate bonds?
Corporate bonds are debt securities issued by private firms to borrow money directly from the public.
What are mortgage-backed securities?
Mortgage-backed securities represent an ownership claim in a pool of mortgages or an obligation secured by such a pool.
What is common stock?
Common stock represents ownership shares in a corporation.
What is preferred stock?
Preferred stock pays a fixed amount of income each year, but does not convey voting power.
What is an American Depository Receipt (ADR)?
An ADR is a certificate traded in U.S. markets representing ownership in shares of a foreign company.
What is the Dow Jones Industrial Average (DJIA)?
The DJIA is a price-weighted index of 30 large blue-chip corporations.
What is a derivative asset?
A derivative asset’s value is dependent on or contingent upon the value of an underlying asset.
What is a call option?
A call option gives the holder the right to purchase an asset at a specified price before a specified expiration date.
What is a put option?
A put option gives the holder the right to sell an asset at a specified price before a specified expiration date.
What is a futures contract?
A futures contract is an obligation to buy or sell an asset at a specified future date for a predetermined price.
What is an investment company?
An investment company pools and invests funds from individual investors in securities or other assets.
How is Net Asset Value (NAV) calculated?
NAV is calculated as the market value of assets minus liabilities, divided by the number of shares outstanding.
What is a unit investment trust?
A unit investment trust is a fixed portfolio of securities for the life of the fund.
What is an open-end investment company?
An open-end investment company continuously issues or redeems shares at NAV.
What is a closed-end investment company?
A closed-end investment company does not redeem or issue new shares; its shares are traded among investors.
What is a Real Estate Investment Trust (REIT)?
A REIT is a closed-end fund that invests in real estate or mortgages.
What is a hedge fund?
A hedge fund is a private investment fund that pools assets from investors and is managed by a fund manager.
What is a mutual fund?
A mutual fund is an open-end investment company that pools money from many investors to invest in a diversified portfolio.
What is a front-end load?
A front-end load is an entry fee charged when buying into a mutual fund.
What is a back-end load?
A back-end load is an exit fee charged when selling out of a mutual fund.
What is an expense ratio?
The expense ratio represents the operating expenses of a mutual fund.
What is an Exchange Traded Fund (ETF)?
An ETF is a type of investment fund that tracks an index and can be traded like a stock.
What is the price-earnings (P/E) ratio?
The P/E ratio is the ratio of a stock’s price to its earnings per share.
What is a dividend yield?
The dividend yield is the annual dividend payment expressed as a percentage of the stock price.
What is buying on margin?
Buying on margin means borrowing part of the purchase price of a stock from a broker.
What is a margin call?
A margin call occurs when the value of an investor’s margin account falls below the maintenance level.
What is short selling?
Short selling is when an investor borrows stock, sells it, and then buys it back later to return it, hoping to profit from a price decline.
What is insider trading?
Insider trading refers to buying or selling securities based on material, non-public information.
What is a market order?
A market order is a buy or sell order to be executed immediately at the current market price.
What is a price-contingent order?
A price-contingent order is an order where the trader specifies a price at which they are willing to buy or sell a security.
What is a bid price?
A bid price is the price at which a dealer or buyer is willing to purchase a security.
What is an ask price?
An ask price is the price at which a dealer or seller is willing to sell a security.
What is the bid-ask spread?
The bid-ask spread is the difference between the bid price and the ask price, representing the dealer’s profit.
What is a dealer market?
A dealer market is a market where dealers buy and sell securities from their own inventory.
What is an Electronic Communication Network (ECN)?
An ECN is a computer-operated trading network that allows direct trading without a middleman.
What is a Designated Market Maker (DMM)?
A DMM is responsible for maintaining a fair and orderly market in a particular security.
What is algorithmic trading?
Algorithmic trading uses computer programs to make trading decisions based on pre-set criteria.
What is high-frequency trading?
High-frequency trading is a type of algorithmic trading that involves executing a large number of orders at extremely high speeds.
What is a dark pool?
A dark pool is a private trading venue where investors can trade large blocks of securities without revealing their intentions.
What is a full-service broker?
A full-service broker provides personalized investment advice, as well as executes trades on behalf of clients.
What is a discount broker?
A discount broker executes trades for clients but offers little or no investment advice.
What are explicit trading costs?
Explicit trading costs refer to the brokerage commissions paid when a trade is executed.
What are implicit trading costs?
Implicit trading costs include the bid-ask spread and the price concessions when trading large quantities of securities.
What is the Wilshire 5000 index?
The Wilshire 5000 is a broad-based market index used as a benchmark for the performance of equity fund managers.
What is insider information?
Insider information is non-public, material information about a company that can affect its stock price.
What is capital gains tax?
Capital gains tax is a tax on the profit made from the sale of a financial asset, like stocks or real estate.
What is a revenue bond?
A revenue bond is a municipal bond backed by the revenue generated from the project it is issued to finance.
What is a general obligation bond?
A general obligation bond is a municipal bond backed by the full taxing power of the issuing government.
What is a Treasury note?
A Treasury note is a U.S. government debt security with a maturity of 1 to 10 years.
What is a Treasury bond?
A Treasury bond is a U.S. government debt security with a maturity of 10 to 30 years.
What is a municipal bond?
A municipal bond is a debt security issued by a state, municipality, or county to finance public projects.
What is a callable bond?
A callable bond is a bond that can be redeemed by the issuer before its maturity date at a specified call price.
What is a convertible bond?
A convertible bond is a bond that can be converted into a specified number of shares of the issuing company’s stock.
What is inflation-protected Treasury bond (TIPS)?
TIPS are U.S. government bonds that are indexed to inflation, providing protection against inflation risk.
What is a conforming mortgage?
A conforming mortgage is a loan that meets the underwriting guidelines set by Fannie Mae and Freddie Mac.
What is a subprime mortgage?
A subprime mortgage is a high-risk loan offered to borrowers with weaker credit.
What is residual claim?
Residual claim refers to the right of shareholders to the remaining assets of a company after all debts have been paid.
What is limited liability?
Limited liability means that shareholders can only lose the amount they invested in the company, not more.
What is a capital gain?
A capital gain is the profit made from selling an asset for more than its purchase price.
What is a stock market index?
A stock market index is a measurement of the performance of a section of the stock market.
What is the S
500 index? & The S&P 500 is a market-value-weighted index of 500 large U.S. companies.
What is the Nasdaq index?
The Nasdaq index tracks the performance of more than 3,000 technology and growth-oriented companies.
What is the role of a mutual fund manager?
A mutual fund manager selects investments for the fund to meet its stated objectives.
What is a balanced mutual fund?
A balanced mutual fund holds both equities and fixed-income securities in stable proportions.
What is an index fund?
An index fund seeks to replicate the performance of a specific market index.
What is a hedge fund fee structure?
Hedge funds typically charge a management fee plus a percentage of the profits (e.g., “2 and 20”).
What is a sector fund?
A sector fund is a mutual fund that focuses its investments on a specific industry or sector.
What is the role of the Federal Reserve in margin trading?
The Federal Reserve sets the margin requirements for borrowing in stock trading.
What is a maintenance margin?
A maintenance margin is the minimum amount of equity that must be maintained in a margin account.
What is NAV in mutual funds?
NAV, or Net Asset Value, is the value of a mutual fund’s assets minus liabilities, divided by the number of shares outstanding.
What are the advantages of ETFs?
ETFs can be traded like stocks, sold short, bought on margin, and are generally cheaper than mutual funds.
What is a revenue bond used for?
Revenue bonds are used to finance specific projects, with repayments made from the revenue generated by those projects.
What is a long position in futures trading?
A long position is the commitment to purchase an asset at a future date at a specified price.
What is a short position in futures trading?
A short position is the commitment to deliver an asset at a future date at a specified price.
What is the function of a broker?
A broker facilitates the buying and selling of securities for investors.
What is a full-service broker?
A full-service broker provides investment advice, research, and trade execution services to clients.
What is a discount broker?
A discount broker executes trades for clients at lower fees but offers minimal or no investment advice.
What is the purpose of short selling?
Short selling allows investors to profit from a decline in a security’s price by selling borrowed shares and buying them back later at a lower price.
What is the primary market?
The primary market is where new securities are issued and sold to investors for the first time.
What is the secondary market?
The secondary market is where previously issued securities are bought and sold among investors.
What is a broker’s call loan?
A broker’s call loan is a loan that brokers use to fund margin accounts for investors.
What is the Federal funds rate?
The Federal funds rate is the interest rate at which banks lend reserve balances to other banks overnight.
What is the LIBOR rate?
LIBOR was the premier interest rate used for short-term loans in the international money markets, now replaced by other benchmarks.
What is a money market fund?
A money market fund is a mutual fund that invests in short-term, low-risk money market instruments.
What is the bid price in a stock transaction?
The bid price is the price a buyer is willing to pay for a security.
What is the ask price in a stock transaction?
The ask price is the price a seller is willing to accept for a security.
What is the bid-ask spread?
The bid-ask spread is the difference between the bid price and the ask price in a stock transaction.
What is a municipal revenue bond?
A municipal revenue bond is a bond backed by the revenue generated from the project it finances.
What is a general obligation bond?
A general obligation bond is backed by the credit and taxing power of the issuer, typically a government.
What is an American Depository Receipt (ADR)?
An ADR is a certificate that represents shares in a foreign company and is traded in U.S. financial markets.
What is equity in a company?
Equity represents ownership in a company, typically in the form of common stock.
What is a bond?
A bond is a debt security where the issuer borrows money from investors and promises to repay with interest.
What is diversification in investing?
Diversification involves spreading investments across various assets to reduce risk.
What is capital market?
The capital market is a financial market for buying and selling long-term debt and equity instruments.
What is asset allocation?
Asset allocation is the process of distributing investments across different asset classes like stocks, bonds, and cash.
What is security selection?
Security selection is the process of choosing specific securities within an asset class for investment.
What is a mortgage-backed security?
A mortgage-backed security is a financial instrument secured by a pool of mortgage loans.
What is a hedge fund?
A hedge fund is an investment fund that uses various strategies to earn active returns for its investors.
What is an exchange-traded fund (ETF)?
An ETF is a type of investment fund that tracks an index and trades on exchanges like a stock.
What is liquidity in finance?
Liquidity refers to how easily an asset can be converted into cash without affecting its price.
What is a callable bond?
A callable bond allows the issuer to repay the bond before its maturity date at a specified price.
What is a convertible bond?
A convertible bond can be converted into a predetermined number of shares of the issuing company’s stock.
What is the Dow Jones Industrial Average (DJIA)?
The DJIA is a price-weighted index that tracks 30 major U.S. companies.
What is the Standard
Poor’s 500 (S&P 500)? & The S&P 500 is a market-value-weighted index of 500 large U.S. companies.
What is inflation risk?
Inflation risk is the potential for inflation to reduce the purchasing power of future cash flows from an investment.
What is the purpose of mutual funds?
Mutual funds pool money from many investors to invest in a diversified portfolio of securities.
What is the Wilshire 5000 index?
The Wilshire 5000 is a comprehensive market index that tracks nearly all publicly traded U.S. stocks.
What is an option in financial markets?
An option is a financial contract that gives the holder the right, but not the obligation, to buy or sell an asset at a specific price within a certain period.
What is a futures contract?
A futures contract is an agreement to buy or sell an asset at a future date for a predetermined price.
What is a mutual fund’s expense ratio?
A mutual fund’s expense ratio is the percentage of a fund’s assets that are used to cover operating expenses.
What is the capital gains yield?
The capital gains yield is the price appreciation or increase in the value of an asset or investment.
What is dividend income?
Dividend income is the payment made by a corporation to its shareholders from its profits.
What is market capitalization?
Market capitalization is the total value of a company’s outstanding shares of stock.
What is a hedge?
A hedge is an investment strategy used to reduce or limit the risk of adverse price movements in an asset.
What is an index fund?
An index fund is a mutual fund designed to track the performance of a specific market index.
What is portfolio diversification?
Portfolio diversification is the practice of investing in a variety of assets to reduce risk.
What is systematic risk?
Systematic risk is the risk inherent to the entire market or market segment, which cannot be diversified away.
What is unsystematic risk?
Unsystematic risk is specific to a company or industry and can be reduced through diversification.
What is a callable option?
A callable option allows the issuer of a bond to repurchase it before the maturity date.
What is a strike price?
The strike price is the price at which the holder of an option can buy or sell the underlying asset.
What is a call option?
A call option gives the holder the right to buy an asset at a specified price within a specified time period.
What is a put option?
A put option gives the holder the right to sell an asset at a specified price within a specified time period.
What is a premium in options trading?
The premium is the price paid for purchasing an option contract.
What is a long position?
A long position is the purchase of a security with the expectation that its value will rise.
What is a short position?
A short position is when an investor sells a borrowed security, expecting its price to decline.
What is insider trading?
Insider trading involves buying or selling a security based on non-public, material information.
What is liquidity risk?
Liquidity risk is the risk that an asset cannot be sold quickly without a significant price concession.
What is interest rate risk?
Interest rate risk is the risk that changes in interest rates will negatively affect the value of an investment.
What is credit risk?
Credit risk is the risk that a borrower will default on their debt obligations.
What is a limit order?
A limit order is an order to buy or sell a security at a specific price or better.
What is a market order?
A market order is an instruction to buy or sell a security immediately at the best available price.
What is an over-the-counter (OTC) market?
An OTC market is a decentralized market where securities are traded directly between parties without a formal exchange.
What is the role of a clearinghouse in futures trading?
A clearinghouse acts as an intermediary between buyers and sellers in futures contracts to ensure the transaction is completed.
What is a margin account?
A margin account allows investors to borrow money from their broker to purchase securities.
What is a maintenance margin?
A maintenance margin is the minimum amount of equity that must be maintained in a margin account.
What is an initial public offering (IPO)?
An IPO is the first time a company offers its shares to the public for purchase.
What is a corporate bond?
A corporate bond is a debt security issued by a corporation to raise capital.
What is a tax-exempt bond?
A tax-exempt bond is a bond where the interest income is exempt from federal income tax, often issued by municipalities.
maintenance level
the maintenance level is 1 minus the minimum percentage of the total investment value that must be covered by the investor’s own funds to avoid a margin call from the broker
