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Financial Economics > Chapter 1 > Flashcards

Chapter 1 Flashcards

1
Q

What are these items describing?

  • Used to produce goods and services
  • Can be tangible or intangible
  • Have innate productive capacity
  • Examples: Buildings, land, machines, and intellectual property
A

Real Assets

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2
Q

What are these items describing?

  • Claims to the income generated by real assets or claims on income from the government
  • Do not directly contribute to the productive capacity of the economy
  • Examples: Stocks and bonds
A

Financial Assets

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3
Q

What are these item describing?

  • Fixed-Income/Debt Securities
  • Equity
  • Derivative Securities
A

Types of Financial Assets

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4
Q

Promises either a fixed stream of income or a stream of income determined by a specified formula (e.g., corporate bonds)

A

What are Fixed-Income/Debt Securities?

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5
Q

Represents ownership share in a firm (e.g., common stock)

A

What is Equity?

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6
Q

Payoff depends on the value of other financial variables such as stock prices, interest rates, or exchange rates.

A

What are Derivative Securities?

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7
Q

What are these items describing?

  • Currency
  • Commodities
A

Other Types of Financial Markets

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8
Q

Below are the characteristics of _________

  • $2 trillion of currency traded each day in London alone
  • Worldwide trading volume exceeds $6 trillion
A

Currency Markets

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9
Q

Below are the characteristics of _________

  • Corn, wheat, and natural gas
  • Multiple exchanges including the New York Mercantile Exchange and the Chicago Board of Trade
A

Commodity Markets

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10
Q

Conflicts of interest between managers and owners (shareholders)

A

What are Agency Problems?

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11
Q

What are the items below describing?

  • Compensation plans tie the income of managers to the success of the firm
  • Monitoring from the board of directors
  • Monitoring by large investors and security analysts
  • Threat of takeover for poor performers
A

Ways to Mitigate Potential Agency Problems

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12
Q

Below are the characteristics of _________

  • Passed in 2002 in response to ethics scandals
  • Focused on corporate governance
A

The Sarbanes-Oxley Act (SOX)

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13
Q

What are the items below describing?

  • Choice among broad asset classes
  • Example: stocks, bonds, real estate, etc.
A

Asset Allocation

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14
Q

What are the items below describing?

  • Choice of securities within each asset class
  • Example: Ford, Alphabet, Microsoft, General Mill, etc.
A

Security Selection

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15
Q

Involves the valuation of particular securities that might be included in the portfolio

A

What is a Security Analysis?

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16
Q

What are the items below describing?

  • “Top-down” approach
  • “Bottom-up” approach
A

Types of Security Analyses

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17
Q

Asset allocation followed by determination of particular securities to be held in each asset class

A

What is the “Top-down” Approach Security Analysis?

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18
Q

Investment based on attractively priced securities without as much concern for asset allocation

A

What is the “Bottom-up” Approach Security Analysis?

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19
Q

True or False?

Financial markets are highly competitve

A

True

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20
Q

True or False?

Financial markets are mildly competitive

A

False

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21
Q

Higher-risk assets are priced to offer higher expected returns than lower-risk assets

A

What is Risk-Return Tradeoff?

22
Q

What are the items below describing?

  • The prices of securities fully reflect available information
  • If true, there would exist neither underpriced nor overpriced securities
A

Efficient Market Hypothesis

23
Q

What are the items below describing?

  • Highly diversified portfolio
  • No attempt to improve investment performance by identifying mispriced securities
A

Passive Management

24
Q

What is this describing?

  • Focus on improving performance by finding mispriced securities or by timing the performance of broad asset classes
A

Active Management

25
Q

What are the items below describing?

  • Net demanders of capital
  • Raise capital now to pay for investments in plan and equipment
A

Firms

26
Q

What are the items below describing?

  • Typically, net suppliers of capital
  • Purchase securities issued by firms that need to raise funds
A

Households

27
Q

What is this describing?

  • Can function as borrowers or lenders, depending on the relationship between tax revenue and government expenditures
A

Governments

28
Q

Bring the suppliers of capital (investors) together with the demanders of capital (primarily corporations and the federal government)

Examples:

  • Investment companies
  • Banks
  • Insurance companies
  • Credit unions
A

What are Financial Intermediaries?

29
Q

What are the items below describing?

  • Specialize in the sale of new securities to the public. Typically, by underwriting the issue
  • Advise the issuing corporation on appropriate price, interest rate, etc.
A

Investment Bankers

30
Q

Market where new issues of securities are offered to the public for the first time

A

What are Primary Markets?

31
Q

Market where investor trade previously issued securities among themselves

A

What are Secondary Markets?

32
Q

The application of technology to financial markets

A

What is FinTech?

33
Q

Provide record of transactions securely added to a public distributed ledger

A

What are Blockchains?

34
Q

Payment systems that use blockchain technology

A

What is Cryptocurrency?

35
Q

What are the items below describing?

  • Digital Tokens
  • Digital Currency
A

Types of Cryptocurrencies

36
Q

Issues in an initial coin offering and can eventually be used to purchase products or services from the start-up

A

What are Digital Tokens?

37
Q

Sovereign cryptocurrency

A

What is Digital Currency?

38
Q

Pooled, regulated, and professionally managed money open to the public

A

What are Mutual Funds?

39
Q

Pooled, private, and professionally managed money open only to institutional investors or wealthy individuals

A

What are Hedge Funds?

40
Q

Professionally managed money invested in new, not yet publicly traded firms. Commonly take an active role in the management of a start-up firm

A

What is Venture Capital?

41
Q

Refers to investments in companies whose shares are not publicly traded in a stock market

Examples: Venture capital, buyout funds (professionally managed money that enlists debt to take public firms private)

A

What is Private Equity?

42
Q

What are the items below describing?

  • Mortgage loans came from a local lender - a neighborhood savings bank or credit union
  • Typical thrift institution would have as its major asset a portfolio of these long-term home loans
  • Thrift’s main liability were depositors’ accounts
A

The Old Way of Housing Finance

43
Q

What are the items below describing?

  • Securitization: the pooling of loans into standardized securities backed by those loans; can be traded like any other security
  • Fannie Mae and Freddie Mac became the behemoths of the mortgage market
A

The New Way of Housing Finance

44
Q

The pooling of loans into standardized securities backed by those loans; can be traded like any other security

A

What is Securitization?

45
Q

True or False?

Conforming mortgages were pooled almost entirely through Freddie Mac and Fannie Mae

A

True

46
Q

True or False?

Conforming mortgages were entirely separated from Freddie Mac and Fannie Mae

A

False

47
Q

First claim on repayments from the entire pool

A

What are Senior Tranches?

48
Q

Paid only after the senior tranches

A

What are Junior Tranches?

49
Q

An insurance contract against the default of one or more borrowers. Purchaser of the swap pays an annual premium for protection from credit risk.

A

What are Credit Default Swaps?

50
Q

The risk of breakdown in the financial system, particularly due to spillover effects from one market into others

A

What is Systemic Risk?

51
Q

What are the items below describing?

  • Mechanisms to mitigate systemic risk
  • Stricter rules for bank capital, liquidity, and risk management practices
  • Creation the Office of Credit Ratings within the SEC to oversee the credit rating agencies
A

The Dodd-Frank Reform Act

52
Q
A

Financial Economics (6 decks)

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