CH1 Flashcards
What are real assets?
Assets used to produce goods and services.
What are financial assets?
Claims on real assets or the income generated by them.
What must financial assets equal?
Financial liabilities.
What does the Domestic Net Worth equal?
Sum of real assets.
What are fixed-income (debt) securities?
Pay a specified cash flow over a specific period.
Define equity in the context of investments.
An ownership share in a corporation.
What are derivative securities?
Securities providing payoffs that depend on the values of other assets.
What is the informational role of financial markets?
Capital flow to companies with the best prospects.
True or False: Market price equals fair value.
True. (However markets aren’t always efficient)
What does consumption timing in investments refer to?
Using securities to store wealth and transfer consumption to the future.
How do investors select their desired risk level?
By choosing between different types of investments, such as bonds vs. stocks.
What are mitigating factors for agency problems?
Performance-based compensation, boards of directors, threat of takeovers.
Why is trust important in corporate governance?
Lack of trust leads to additional costly laws and regulations.
What is a significant consequence of governance and ethics failures?
They cost the economy and erode public support and confidence.
Define security selection.
Choice of particular securities within an asset class.
What is security analysis?
Analysis of the value of securities.
What is the average loss for stock portfolios?
25%.
What is passive management?
Buying and holding a diversified portfolio without attempting to identify mispriced securities.
What is active management?
Identifying mispriced securities or forecasting broad market trends.
Who are net borrowers?
Business firms that raise capital now to pay for investments.
Who are net savers?
Households that purchase securities issued by firms.
What role do financial intermediaries play?
They connect borrowers and lenders.
What types of entities can be financial intermediaries?
- Commercial banks
- Investment companies
- Insurance companies
- Pension funds
- Hedge funds
What do investment bankers specialize in?
Primary market transactions.
What is the difference between the primary and secondary market?
Primary market involves newly issued securities, while secondary market involves preexisting securities traded among investors.
What is venture capital?
Equity investment to finance new firms.
What is private equity?
Investments in privately-held companies.
What does securitization involve?
Bundling mortgage loans into large pools and creating mortgage-backed securities.
Fill in the blank: The old way of mortgage finance was ‘originate to _______’.
hold.
Fill in the blank: The new way of mortgage finance is ‘originate to _______’.
distribute.
What is a characteristic of adjustable-rate mortgages?
They have rising loan-to-value ratios
This characteristic can affect borrower payments and financial stability.
What are CDOs?
Collateralized Debt Obligations that consolidate default risk of loans onto one class of investor and divide payment into tranches
Ratings agencies were pressured to give high ratings to these financial products.
What are some features of the Dodd-Frank Reform Act?
Stricter rules for bank capital, liquidity, risk management, mandated increased transparency, clarified regulatory system
The Volcker Rule is a notable component of this act.
What does the Volcker Rule entail?
It mandates restrictions on proprietary trading by banks
This aims to reduce the risk of financial crises.
Fill in the blank: The financial crisis of 2008-2009 was characterized by _______.
highly leveraged banks and systemic risk
This led to significant instability in financial markets.
