Chapter 1 - background and issues

Question 1

investment

Answer 1

the current commitment of money or other resources in the expectation of reading future benefits

Question 2

real asset

Answer 2

the land, buildings, equipment, and knowledge that can be used to produce goods and services

Question 3

financial asset

Answer 3

stocks and bonds, claims on real assets, or the income generated by them

Question 4

what is the relationship between real and financial assets for firms?

Answer 4

Firms use the money raised from financial assets to pay for real assets

Question 5

fixed-income (debt) securities

Answer 5

Pay a specified cash flow over a specific period

Question 6

floating rate bonds

Answer 6

payments depend on current interest rates

Question 7

money market securities

Answer 7

short-term, highly liquid, generally low risk

Question 8

capital market securities

Answer 8

long-term securities

Question 9

equity (common stock)

Answer 9

represents an ownership share in the corporation

Question 10

derivative securities

Answer 10

Securities provide payoffs that depend on the values of other assets

Question 11

agency problems

Answer 11

Conflicts of interest between managers and stockholders

Question 12

asset allocation

Answer 12

Portfolio choice among broad investment classes

Question 13

security selection

Answer 13

Choice of specific securities within each asset class

Question 14

security analysis

Answer 14

Analysis of the value of securities

Question 15

risk-return tradeoff

Answer 15

Assets with higher expected returns entail greater risk

Question 16

passive management

Answer 16

Buying and holding a diversified portfolio without attempting to identify mispriced securities

Question 17

active management

Answer 17

Attempting to identify mispriced securities or to forecast broad market trends

Question 18

firms

Answer 18

Net demanders of capital, for investments, income generated provides the returns to investors

Question 19

households

Answer 19

Net suppliers of capital, purchase securities issued by firms that look to raise capital

Question 20

governments

Answer 20

• Borrowers or lenders
• Since WWII US gov runs budget deficits
• Borrows funds through the issuance of T bills, notes, and bonds

Question 21

financial intermediaries

Answer 21

Institutions that “connect” borrowers and lenders by accepting funds from lenders and loaning funds to borrowers

Question 22

investment companies

Answer 22

Financial intermediaries that invest the funds of individual investors in securities or other assets

Question 23

investment bankers

Answer 23

Firms specializing in the sale of new securities to the public, typically by underwriting the issue

Question 24

distributed ledger

Answer 24

• the record of transactions is distributed over a network of connected computers
• No single administrator, no single target for hackers

Question 25

venture capital

Answer 25

Money invested to finance a new, privately held firm

Question 26

private equity

Answer 26

Investments in companies whose shares are not traded in public stock markets

Question 27

private equity

Answer 27

Investments in companies whose shares are not traded in public stock markets

Question 28

securitization

Answer 28

Pooling loans into standardized securities backed by those loans, which can then be traded like any other security

Question 29

systemic risk

Answer 29

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