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Investment analysis and portfolio management > Chap 2 > Flashcards

Chap 2 Flashcards

1
Q

Money market

A

subsector of fixed income market

short-term, high-liquid and low risk debt instruments

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2
Q

US Treasury bills

A

sold by government to public investors -> raise funds at discount rate
Highly liquid
Incomes from T-bills are exempted from taxes and local taxes

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3
Q

Specified securities of Money Market

A
  • Treasury bill
  • Certificates of Deposit
  • Commercial paper
  • Banker’s acceptance
  • Eurodollars
  • Repos and Reserves
  • Brokers call
  • Federal funds
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4
Q

Ask price

A

Price dealer willing to sell

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5
Q

Bid price

A

Price dealer willing to purchase

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6
Q

bid-ask spread

A

difference between bid and ask price

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7
Q

bank-discount method

A

bill’s discount from its maturity
360 days
% of face value

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8
Q

Asked yield (bond yield equivalent)

A

yield that investor makes when hold bill until maturity

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9
Q

Certificate of Deposit (CD)

A

time deposit with a bank
cannot be withdrawn on demand and only get paid interest
only get principal at the end

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10
Q

Commercial paper (CP)

A

short term unsecured debt
issued by large corporation
Maturity: 1-2monts
traded in secondary market, quite liquid

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11
Q

Banker acceptance

A

an order to a bank to pay a sum of money at a future date (6 months)
“accepted” -> banks are responsible for paying the holders of the acceptance
can be traded in secondary market

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12
Q

Eurodollars

A

dollar denominated time deposits at a foreign bank, not necessarily EU banks
eurodollar deposits are for large bank, around 6 months

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13
Q

Repos

A
  • Repurchase agreements
  • short-term sales of securities with an agreement to repurchase the securities at a higher price
  • safe on term of credit risk
  • act as collateral if the borrower defaults.
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14
Q

reverse repo

A
  • mirror image of repo
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15
Q

broker’s call

A
  • individuals buying stocks on margin borrow part of the funds to pay for the stocks from their broker
  • rates paid are around 1% higher than rate on short term T-bills
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16
Q

Federal funds

A

funds in the accounts of commercial bank at Federal Reverse Bank
- Fed funds rate commands great interest as key barometer of monetary policy

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17
Q

LIBOR market (London interbank offer rate)

A
  • Rate large banks in London are willing to lend money among themselves, serving as the benchmark for financial contracts
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18
Q

EUIBOR

A

similar to LIBOR but in eurozone

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19
Q

Money market securities’s yields

A

Low risk but not risk free -> higher yields than T-bill

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20
Q

Specified securities of Bonds Market

A
  • Treasury bonds and notes
  • Federal agency debt
  • Municipal bonds
  • Corporate bonds
  • Mortage-backed securities
21
Q

Specified securities of Equity Market

A
  • common stocks

- preferred stocks

22
Q

Specified securities of Derivatives Market

A
  • Options
  • Futures and forwards
  • Swaps
23
Q

Indexes

A
  • Dow Jones averages
  • Standard and poor
  • Bond market indicators
  • International indexes
24
Q

Bond markets

A

longer term

sometimes called fixed income capital market

25
Q

Treasury notes and bonds

A
  • debt obligations of federal government with original maturity for 1 year
  • semi annual payment
26
Q

Yield to maturity

A

calculated by determining semi annual yield then doubling it

27
Q

inflation protected treasury bond

A

bonds issued by government, provide citizens hedge from inflation rate

28
Q

federal agency debt

A

government issues their own securities -> finance their own debts
agencies are formed to channel credit to a particular sector of the economy

29
Q

international bonds

A

Eurobonds/international bonds: bonds denominated by the currency of other countries from the country it is issued

30
Q

municipal bonds

A

bonds issued by state and local government

exempted form federal income taxations

31
Q

2 types of municipal bonds

A
  • General obligation bonds: backed by “full faith and credit” of issuer
  • revenue bonds: issued to finance commercial enterprises; backed by the revenues from a given project or by the municipal agency operating the project.
32
Q

when compare

A

after tax return and tax exempt bonds

33
Q

What is the yield ratio for municipal bonds? (r[taxable])

A

r[muni] / r[taxable] = Yield ratio

34
Q

Tax bracket

A

1 - r[muni] / r[taxable]

35
Q

whether to hold taxable debt or municipal debt?

A

1 > r[taxable] > 0: Hold taxable debt

r[taxable] > 1: hold municipal debt

36
Q

Corporate bonds

A

private firms borrow money directly from public using corporate bonds
paying semi annual coupons during bond’s lives and return face value at maturity

37
Q

types of corporate bonds

A

5 types:

  • secured bonds
  • subordinated debentures
  • debentures
  • callable bonds
  • convertible bonds
38
Q

Callable bonds

A

Bonds that give the firm the option to repurchase the bond from the holder at a stipulated call price.

39
Q

Convertible bonds

A

give the bond holder the option to convert each both into a stipulated number of shares of stock.

40
Q

Mortgage backed securities

A
  • ownership claims a pool of mortgage / an obligation secured by a pool
41
Q

conforming mortgage

A

loans that satisfy certain underwriting guidelines

42
Q

subprime mortgage

A

riskier loans made to financially weaker borrowers, make housing more affordable

43
Q

common stocks/equities

A

ownership shares in a corporation, entitles to 1 vote

44
Q

proxy vote

A

shareholders who cant attend the annual meeting can vote by proxy

45
Q

characteristics of common stocks

A
  • Residual claims: stockholders are last in line in event of liquidating
  • Limited liability: not personally liable for firm’s obligation
46
Q

Listings of stocks

A

comparison table with certain information highlights key info

47
Q

Price to earning ratio (PE Ratio)

A

ratio of current stock price to last year earnings per share

48
Q

Preferred stocks

A
  • promise to pay stockholders fixed income; doesnt convery to voting power
  • pay dividends to stockholders
    treated as dividends more than interest -> not tax-deductible
49
Q

Dow jones average

A

performance of 30 large, blue-chop in US since 1986

Investment analysis and portfolio management (11 decks)

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