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Financial markets and institutions > ch 9-12 - midterm to quiz 2 > Flashcards

ch 9-12 - midterm to quiz 2 Flashcards

1
Q

mortgage

A

a form of debt to finance a real estate investment

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2
Q

loan to value ratio

A

indicates the proportion of the property’s value that is financed by debt

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3
Q

prime mortgage

A

borrower meets traditional lending standards, higher credit rating

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4
Q

subprime mortgage

A

borrower does not qualify for a prime loan, lower credit rating

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5
Q

Alt-A mortgage

A

satisfies some but not all o the criteria for rime loans, but have lower risk than subprime

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6
Q

insured mortgage

A

loan is insured by FHA or VA

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7
Q

conventional mortgage

A

loan is not insured by FHA or VA but can be privately insured`

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8
Q

fixed rate mortgage

A
  • interest rate is decided at closing and does not change
  • exposes the holder to interest rate risk
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9
Q

amortizing fixed rate mortgages

A
  • monthly payments aren token down by principal and interest
  • during the early years, most of the payment reflects interest
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10
Q

adjustable rate mortgage

A
  • the interest rate will change over the life of the loan
  • rate starts lower than a fixed rate loan
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11
Q

balloon mortgage

A

fixed rate loan that is amortized over a conventional period, such as 30 years, and the final payment is typically dues after 5-10 years

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12
Q

graduated payment mortgage

A

can have a fixed or variable rate of interest but allows payments to be lower in the early years, progressively increase over the life of the loan

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13
Q

growing equity mortgage

A

higher payments than a conventional loan, but the additional payment is applied to the principal in order to pay off the loan quicker

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14
Q

reverse annuity mortgage

A

allows homeowners 62 or older to access the equity in their primary residence while continuing to live in their home

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15
Q

shared-appreciation mortgage

A

allow a home purchaser to obtain a mortgage at a below-market interest rate

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16
Q

second mortgages

A
  • can be used in conjunction with the primary/first mortgage
  • Home equity loan or HELOC
  • Allows borrowing based on additional equity in the property
  • Typically, shorter term and higher rate than the first mortgage
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17
Q

how to value mortgages

A

Price equals present values of cash flows plus a risk premium

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18
Q

mortgage risks

A
  • repayment risk
  • credit risk
  • interest rate risk
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19
Q

common stock

A
  • represents a proportionate share of ownership
  • lowest seniority in the capital stack and last to be paid in bankruptcy
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20
Q

preferred stock

A
  • has preference over CS in terms of dividend payouts
  • primarily an income investment
  • price is sensitive to interest rate changes
  • senior to CS but subordinate to bonds
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21
Q

IPO process - prospectus

A

detailed information about the firm, including financial statements and a discussion of risks

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22
Q

IPO process - road show

A

Key employees in the firm visit institutional investors to attract buyers for the IPO

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23
Q

IPO process - offer price

A

the price the shares will be offered at the time of the IPO

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24
Q

IPO process - pricing and book building

A

The lead underwriter must determine the offer price at which the shares will be offered at the time of the IPO

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25
Q

IPO process - allocation of IPO shares

A

to expand the list of potential buyers the underwriter may form a syndicate of underwriters to sell the shares and determine who will be the ultimate buyers of the primary offering

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26
Q

IPO offer price

A

the price paid by the initial buyers of the primary offering

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27
Q

over allotment(green0shoe) option

A
  • provides the underwriter the flexibility to allocate an additional 15% of firm’s shares for up to 30 days post IPO
  • sold at the offer price not the market price
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28
Q

“lock up” provisions

A

Prevents the original owners/investors of the firm from selling their shares for a specified period

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29
Q

private equity

A

Generally, provides capital to more established companies or provides equity to companies or purchasing them outright

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30
Q

venture capital funds

A
  • Form of PE investment for startups
  • Generally, the VC makes an investment for an equity stake in the company
  • Receives money from wealthy investors and pension funds that are willing to maintain the investment for a long-term period(5-10 years generally)
  • Not allowed to withdraw their money before a specified deadlines
31
Q

LBO

A
  • acquisitions that require substantial amounts of borrowed funds
  • PE firm uses the enterprise value and “leverages” it through making an equity investment and then using public/private financing
32
Q

Special purpose acquisition company

A
  • A shell company designed to take companies public without going through the traditional IPO process
  • expedited process to go public
33
Q

organized exchanges

A

Physical trading floor where traders execute transactions - most trades are executed electronically

34
Q

floor brokers

A

execute orders either for clients or for their own account

35
Q

floor brokers

A

execute orders either for clients or for their own account

36
Q

board of directors

A

Approving strategy and financial plans as well as ensuring decisions are made in the best interest of investors, employees and the community

37
Q

role of analysts

A

Monitor stocks, asses their value and publicize an opinion of the company and stock price

38
Q

proxy contest

A

shareholders can exercise their right to vote and may engage in “proxy” contests to attempt to:
- change the composition of the board
- Limit salaries for management
- Improve transparency
- Change the bylaws

39
Q

antitakeover amendments

A

may require that at least ⅔ of the shareholder votes approve a takeover

40
Q

poison pills

A

special rights awarded to shareholders or specific managers on the occurrence of specified events

41
Q

golden parachutes

A

specific large amounts of compensation to managers if they lose their jobs or change in control of the firm

42
Q

fundemental analysis

A

a review of the financial characteristics of the firm and industry to produce a stock valuation

43
Q

P/E ratio analysis

A
  • investors forecast the future earnings
  • Apply the mean ratio used for the industry to identify the price
  • Value per share = expected EPS x mean industry P/E
44
Q

what are the limitations of P/E ratio analysis?

A
  • Earnings forecasts can differ
  • P/E ratio for the industry/peer group is not obvious
  • Stock buybacks can distort a firm’s earnings
45
Q

dividend discount model

A

The price of the stock should reflect the PV of future dividends

46
Q

what are the flaws of the dividend discount model?

A
  • Assumes no changes in dividend in perpetuity
  • Errors can be made in determining the dividend to be paid, the growth rate, and the RRR
  • Errors are more pronounced for the firms that retain most of their earnings
47
Q

Free cash flow model(for firms that do not pay dividends)

A
  • Estimate the free cash flows that will result from operations
  • Subtract existing liabilities to determine the value of the firm
  • Divide the value of the firm by the number of shares to derive a value per share
48
Q

how is the risk of a stock measured?

A
  • Volatility of the stock? - what is the SD
  • Volatility of a portfolio? - what is the SD
  • How does the stock move in relation to the overall market? - what is the beta
  • VaR measures statistical expectations for losses using designated confidence intervals
  • Risk adjusted stock performance - Sharpe ratio
49
Q

VIX

A

measures the market’s expectations for volatility over the next 30 days

50
Q

beta

A
  • A relative measure of how the stock move in relation to the overall market
  • High beta stocks are expected to be relatively volatile because they are more sensitive to market returns over time
51
Q

value at risk and stressed value at risk

A
  • Statistical expectations for losses using designated CI(confidence interval)
  • Utilizes a data set to determine statistical probabilities of potential losses within a CI
  • Used widely by risk managers and regulators in combination with other risk management tools
  • Applicable to many investments(fixed income) and a component of how capital requirements are calculated for many financial institutions
  • But there are significant assumptions and limitations
52
Q

Sharpe ratio

A
  • The Sharpe index measures risk-adjusted returns when total variability is the most appropriate measure of risk
  • Measures the excess return above the risk-free rate per unit of risk
53
Q

floor brokers

A
  • fulfill and execute orders on the floor of the stock exchange
  • Small orders(<100,000 shares) are often entered into an electronic trading platform
54
Q

designated market-makers

A
  • can match buyers and sellers, or buy for themselves
  • Stand ready to buy/sell designated stocks if there are no other investors
55
Q

ask(offer)

A

the price a broker will sell a stock

56
Q

bid

A

the price a broker will buy a stock

57
Q

bid-ask spread

A

the difference between the ask and bid price, measured as a percentage of the ask price

58
Q

long position

A

when you buy and hold equities or fixed income positions and will make money when the price goes up

59
Q

short position

A

when you sell a stock you don’t own by borrowing it from your broker, executed when you think the stock is overpriced

60
Q

loss profiles for long and short positions

A
  • Losses from a long position are limited to the amount of money invested
  • Losses for a short position are unlimited
61
Q

short ratio

A

of shares sold short / total # of shares

62
Q

short interest ratio

A

of shares sold short / average daily trading volume

63
Q

market order

A

an order to buy/sell at the best possible price

64
Q

limit order

A

specifies a minimum price to sell or a maximum price to buy

65
Q

stop order

A

used to minimize losses or protect gains

66
Q

margin return formula

A

R = (SP - INV - LOAN + D) / INV

67
Q

what are the requirements for using leverage?

A
  • there is a minimum portion of the equity investment that must be covered with cash(currently 50%)
  • there is a minimum portion of the equity investment that the investors must maintain in the account(currently 30%)
68
Q

margin calls

A

the more margin lending, the more exposed the stock market is to a potential crisis

69
Q

insider trading

A

Illegal act in which corporate insiders buy/sell company stock based on privileged information

70
Q

circuit breakers

A

restrictions on trading when stock prices or a stock index reaches a specified threshold level

71
Q

trading haults

A

implemented when exchange believe investors need more time to receive/absorb material information

72
Q

SEC

A
  • Monitors stock exchanges and reporting by listed companies
  • Requires listed companies to file registration info and financial reports
73
Q

goals of the SEC

A
  1. Full disclosure of relevant information for the benefit of investors
  2. Prevent abuses that would give an unfair advantage to an investor(s)
74
Q

goals of the SEC

A
  1. Full disclosure of relevant information for the benefit of investors
  2. Prevent abuses that would give an unfair advantage to an investor(s)

Financial markets and institutions (8 decks)

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