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SOM Final Exam > Ch. 17 > Flashcards

Ch. 17 Flashcards

1
Q

Time value of money

A

Invested money grows, over time, by earning interest or some other form of return

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2
Q

Compound growth

A

Compounding of interest over time

Cumulative growth from interest paid to the investor over given periods of time

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3
Q

Rule of 72

A

Number of years to double an investment by dividing annual interest rate into 72

If you reinvest annually at 8%, you’ll double your money in 9 years
72/8 = 9

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4
Q

Stock

A

Portion of ownership of a corporation

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5
Q

Shares

A

Company’s total ownership divided into small parts

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6
Q

Common stock

A

Basic form of ownership in a company

Purchased in hope that it will increase in value and provide dividend income

Each share has a vote on major issues that are brought before shareholders

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7
Q

Market value

A

Current price of a share of stock in the stock market

Reflects willingness of buyers to pay for the stock

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8
Q

Book value

A

Asset - Liabilities/Number of shares outstanding

When market value falls to near book value, investors buy stock because it is underpriced and will increase in the future

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9
Q

Dividend

A

Payment to shareholders, on a per-share basis, out of the company’s earnings

Optional and variable

Company’s do not have to pay dividends in order to inc. company

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10
Q

Blue-Chip stocks

A

Common stock issued by a well-established and respected company with a sound financial history and a stable pattern of dividend payouts

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11
Q

Mutual Funds

A

Companies that pool cash investments from individuals and organizations to purchase bundles of stocks, bonds, and other securities

Expected to appreciate in market value and produce income for mutual funds and their investors

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12
Q

No-Load Funds

A

Mutual fund in which investors pay no commissions when they buy in or sell out

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13
Q

Load Funds

A

Mutual fund in which investors are charged sales commissions when they buy in or sell out

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14
Q

Exchange-traded fund (ETF)

A

Bundle of stocks or bonds that are in an index that tracks the overall movement of a market, but can be traded like stock

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15
Q

Primary securities market

A

Market in which new stocks and bonds are bought and sold by firms and governments

Private placements allow issuers to keep plans confidential

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16
Q

Securities

A

Stocks, bonds, mutual funds

Represent “secured” or financially valuable claims on the part of investors

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17
Q

Securities and Exchange Commission (SEC)

A

Government agency that regulates US securities and markets

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18
Q

Investment Bank

A

Financial institution that specializes in issuing and reselling new securities

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19
Q

Three investment banking services

A
  1. Advise companies on the timing and financial terms of new issues
  2. Underwrite- buy and assume liability for- new securities, providing issuing firms with 100 percent of the money
  3. Create distribution networks for moving new securities through other banks and brokers into the hands of individual investors
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20
Q

Second securities market

A

Market in which existing stocks and bonds are sold to the public

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21
Q

Stock exchange

A

Organization of individuals coordinated to provide an institutional auction setting in which stocks can be bought or sold

Trading floor- brokers exchange face-to-face

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22
Q

NASDAQ Market

A

The National Association of Securities Dealers Automated Quotation

Oldest electronic stock market

3,100 companies

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23
Q

Electronic communication networks (ECN)

A

Electronic trading system that brings buyers and sellers together outside traditional stock exchanges

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24
Q

Stock brokers

A

Individual or organization that buy and sell orders on behalf of outside customers in return for commissions

Match buyers with sellers
Do not own the securities
Earn commissions

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25
Q

Book-entry ownership

A

Procedure that holds investors shares in a book entry form, rather than issuing a physical paper certificate

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26
Q

Market index

A

Measure the performance of a large group of stocks or track the price changes in the stock market

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27
Q

Bull market

A

Period of rising stock prices, lasting 12 months or longer, featuring investor confidence for future gains and motivation to buy

28
Q

Bear market

A

Period of falling stock market by negative investor sentiments with motivation to sell ahead of anticipated losses

29
Q

Dow Jones Industrial Average (DJIA)

A

Oldest and most widely cited market index, based in the prices of 30 blue-chip, large cap industrial firms on the NYSE

Reflects the changing composition of companies and industry

30
Q

S&P 500

A

Standard and Poor’s Composition Index

Index of US equities based on the performance of 500 large cap stocks representing various sectors of the equities market
(Technology, energy, industrials, financials, health care, consumer staples, telecommunications)

31
Q

NASDAQ Composite Index

A

Includes NASDAQ listed companies (3,100) with a high proportion of technology companies and small cap stock

32
Q

The Russell 2000

A

Specialty index that uses 2000 stocks to measure the performance of the smallest US companies

33
Q

Risk-return relationship (risk-reward)

A

Safer investments tend to offer lower returns, riskier investments offer higher returns

34
Q

Current dividend yield

A

Yearly dollar amount of income divided by the investments current market value, expressed as a percent

35
Q

Price Appreciation

A

Increase in the dollar value of an investment

36
Q

Capital gain

A

Profit realized from the increased value of an investment

37
Q

Total return

A

Sum of an investments current dividend yield and capital gain divided by original investment multiplied by 100

Expressed as a percent

38
Q

Diversification

A

Purchase of several different kinds of investments rather than just one

Risk of loss is reduced when spreading total investments because its unlikely all stocks will fall at the same time

39
Q

Asset Allocation

A

Relative amount of funds invested in each of several investment alternatives

40
Q

Portfolio

A

Combined holdings of all the financial investments of any company or individual

Stocks, bonds, mutual funds, real estate

41
Q

Secured loan (Asset-backed loan)

A

Borrower guarantees to repay the loan by pledging the asset as collateral to the lender

Collateral- asset pledged for the fulfillment of repaying a loan (house, car, etc.)

42
Q

Loan principle

A

Amount of money that is loaned and must be repaid

43
Q

Interest

A

Fee paid to a lender for the use of borrowed funds (rental fee)

44
Q

Annual percentage rate

A

One year rate that is charged for borrowing, expressed as a percentage of the borrowed principle

45
Q

Working capital

A

Ability to meet short-term operating expenses

Working capital = current assets – current liabilities

46
Q

Unsecured loans

A

No collateral, but a compensating balance (borrower must keep a portion of the loan on deposit with the bank in a non-interest bearing account)

47
Q

Angel investors

A

Outside investors who provide new capital to firms in return for a share of equity ownership

Help firms grow rapidly by providing venture capital

48
Q

Venture capital

A

Private funds from wealthy individuals or companies that seek investment opportunities in new growth companies

49
Q

Corporate bond

A

Formal pledge to obligating the issuer to pay interest periodically and repay the principal at maturity

50
Q

Characteristics of corporate bonds

A

Bond indenture

Maturity date

Face value

Short term bond

Intermediate term bond

Long term bond

51
Q

Bond indenture

A

Legal doc that contains complete details of a bond issue

52
Q

Maturity date

A

Future date when a repayment of a bond is due from the borrower (bond issuer)

53
Q

Face value (Par value)

A

Amount of money the bond buyer (lender) lent the issuer and that the lender will receive on repayment

54
Q

Short, Intermediate, Long-Term Bond

A

Short term bond – less than 5 years

Intermediate term bond – 5 to 10 years

Long term bond – 10+ years

55
Q

Default

A

Failure to make payment when due to lenders

56
Q

Bondholder’s claim

A

Request for court enforcement of a bond’s term of payment

57
Q

Bankruptcy

A

Court-granted permission for a company to not pay of or all debts

58
Q

Mortgage-backed securities (MBS)

A

Mortgages pooled together to form a debt obligation – a bond – that entitles the holder (investor) to cash that flows in from bundled mortgages

59
Q

Initial public offering (IPO)

A

First sale of a company’s stock to the general-public

60
Q

Corporate raider

A

Investor conducting a type of hostile corporate takeover against the wishes of the company

61
Q

Stock split

A

Stock dividend paid in additional shares to shareholders, thus increasing the number of outstanding shares

62
Q

Market Capitalization

A

The total dollar value of all the company’s outstanding shares

63
Q

Debt financing

A

Long-term borrowing from sources outside a company

64
Q

Prospectus

A

Registration statement filed with the SEC for prospective investors about a security to be offered and the issuing company

65
Q

Insider Trading

A

Illegal practice of using special knowledge about a firm for profit or gain

SOM Final Exam (5 decks)

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