Bonds, Stocks and Mutual Funds Review Flashcards
What is investing?
Investing is putting money towards something in hopes of earning a greater return.
What is the difference between equity investing and income investment such as bonds?
Equity investing involves ownership and the potential for higher returns but also higher risk, while income investments like bonds provide a fixed stream of income and are typically considered lower risk.
What is the difference between a bull or bear market?
The difference between a bull and a bear market is that a bull market is marked by rising optimism and prices, while a bear market is characterized by falling prices and a prevailing sense of pessimism. Bull go up, bear go down.
What is the difference between bid and ask price for equity?
The difference between bid and ask price for an equity is that bid is what the customer is willing to pay and ask is what the seller is willing to sell at.
What is discount brokerage?
A discount brokerage is a type of financial service that allows investors to buy and sell securities at a lower commission or fee compared to traditional full-service brokerages.
What is full cover brokerage?
A full-service brokerage is a financial firm that provides a comprehensive range of investment services, including personalized advice, research, financial planning, and the execution of trades.
What is an index?
An index is a way of measuring how a market is doing and where it is going.
How do companies qualify to be included as an index fund?
Companies qualify to be included in an index fund based on the specific criteria set by the index provider. Common factors include market capitalization, sector representation, liquidity, financial performance, geographic location, and adherence to listing and governance standards. Each index has its unique rules for inclusion.
What determines the price of equity and the price of bond?
The price of equity (stock) is primarily determined by supply and demand in the stock market, influenced by factors such as company performance, investor sentiment, and economic conditions. The price of a bond is influenced by interest rates, with bond prices inversely related to interest rates. When interest rates rise, bond prices tend to fall, and when rates fall, bond prices tend to rise. Additionally, factors like the bond’s coupon rate, time to maturity, and credit quality play a role in determining its price.
When would a bond be traded at discount, at par or at premium?
A bond would be traded at discount when it is sold/purchased below the face value which is usually $1000. It is traded at par when it is sold/purchased at face value. And it is traded at premium when it is sold/purchased above face value.
What is the normal face value of a bond?
The normal face value of a bond is $1000.
How would bonds be quoted if it is traded above par, or at discount?
If a bond is traded above its par value, it is said to be trading at a premium. In this case, bonds would be quoted as having a price higher than 100. For example, if a bond has a par value of $1,000 and is trading at $1,050, it is trading at a premium. Conversely, if a bond is traded below its par value, it is said to be trading at a discount. Bonds traded at a discount would be quoted as having a price less than 100. For example, if a bond with a par value of $1,000 is trading at $950, it is trading at a discount.
How are basis points calculated?
Basis points are calculated by dividing a percentage by 100. One basis point is equal to 0.01%, or 1/100th of a percentage point.
Who would issue bonds?
The party responsible for issuing bonds is governments, municipalities, corporations, and other entities as a way to raise capital.
How are bond yields calculated?
Bond yields are calculated by dividing the annual interest or coupon payment by the bond’s current market price. This yield is known as the current yield. Additionally, the yield to maturity (YTM) considers the bond’s future cash flows, including any capital gains or losses if held until maturity.
What is the difference between coupon rate and yield rate?
The coupon rate is the fixed annual interest rate paid on a bond, expressed as a percentage of its face value. The yield rate, specifically yield to maturity (YTM), reflects the total return an investor can expect if the bond is held until maturity, accounting for factors like its current market price and any capital gains or losses. While the coupon rate is fixed, the yield rate may change based on market conditions.
What is the difference between the Principal trade and the Agency transaction?
A principal trade is a transaction in which a financial institution or broker-dealer directly buys or sells securities from its own inventory to a client. In a principal trade, the institution acts as the principal, assuming the risks and rewards of the trade. An agency transaction is when a financial institution or broker acts as an intermediary, facilitating a trade between a buyer and a seller. In an agency transaction, the broker does not take ownership of the securities but earns a commission for facilitating the transaction on behalf of the client.
What is a yield curve?
A yield curve is a way to assess economic expectations and future economic outcomes. It is a tool to assist in forecasting future economic phases or cycles.
What is market capitalization?
Market capitalization is a company’s worth based on market price.
When would a yield curve be negative, positive or flat (slope upward, downward or flat)?
A yield curve would be negative if the forecast of an economy slows down or goes into a recession. A yield curve would be positive if the economy is healthy and growing. A yield curve is flat when the economy is in a transition period from a healthy economy to a recessionary economy.
What is an electronic trading environment? Are all stock markets using this method?
An electronic trading environment is a financial marketplace where securities are bought and sold using computerized systems and networks. In this environment, orders are matched electronically, and transactions occur digitally. While not all stock markets exclusively use electronic trading, many major exchanges globally have adopted electronic trading systems alongside traditional methods. Electronic trading enhances efficiency, speed, and accessibility, allowing investors to execute trades quickly and facilitating a more seamless market experience.
Define these stocks; blue chip, growth, cyclical, speculative, turnaround stocks
Blue chip: well established companies
Growth: high growth ratio and high PE ratio (PE: price earnings ratio; how much an investor is willing to pay per dollar)
Cyclical: stocks that are sensitive to the economic state
Speculative: a stock that you are buying on speculation
Turnaround: the stock has the potential to rise back up again due to certain circumstances
What is the difference between primary and secondary markets?
A primary market is where securities are created and where companies go through their initial public offering. A secondary market is where normal investors buy and sell shares.
Define these terms: IPO, Bid, Ask, Transfer Agent and board lot
IPO: Initial Public Offering - company must have bank or insurance verify their validity
Bid: Price customer is willing to pay
Ask: Price seller is willing to sell at
Transfer Agent: financial institution or individual responsible for maintaining records of shareholders and managing the transfer of ownership of a company’s securities
Board Lot: Typically 100 shares, standardized trading quantity for stocks set by the stock exchange
