Chapter 2 Flashcards
Asset Class
Asset Class - A group of financial securities that are similar in risk, liquidity, and cash flow expectations. Common asset classes include money market securities, fixed-income securities, and equity securities.
Banker’s Acceptance
Banker’s Acceptance - A bank guarantee of an international payment that is sold in the secondary market. They typically sell at a discount and have credit risk according to the risk level of the guaranteeing bank.
Banking Act
Banking Act - Legislation passed in 1933 as a result of the stock market crash of 1929 that separates commercial from investment banking, also known as the Glass Steagall Act.
Best Efforts
Best Efforts - A method of raising capital in the primary market in which the underwriting firm attempts to sell all of the securities to the public but can return any unsold securities to the issuer.
Beta
Beta - The measure of systematic risk of an equity security, with a range of between zero and two.
Blue-Chip Stock
Blue-Chip Stock - A security issued by a well-known company with well-known brand name product lines that tends to perform well in all economies.
Broker-Dealers
Broker-Dealers - Individuals or firms that buy and sell securities, either for their clients or for themselves.
Certificate of Deposit
Certificate of Deposit - Short-term deposits with a financial institution that have stated maturity dates and interest rates. Most impose penalties if redeemed before their maturity dates.
Certified Financial Planner Board of Standards
Certified Financial Planner Board of Standards - The self-regulatory organization that grants the CFP® designation.
Charted Financial Analyst Institute
Charted Financial Analyst Institute - The self-regulatory organization that grants the CFA® designation.
Chartered Alternative Investments Analyst Association
Chartered Alternative Investments Analyst Association - The self-regulatory organization that grants the CAIA® designation.
Collateralized Mortgage Obligation (CMO)
Collateralized Mortgage Obligation (CMO) - A type of mortgage-backed security in which the interest and principal payments are divided into various tranches that have different levels of risk.
Commercial Paper
Commercial Paper - Short-term debt issued by corporations to finance working capital requirements.
Cyclical Stock
Cyclical Stock - An equity security that performs well during economic expansions and poorly during economic contractions.
Defensive Stock
Defensive Stock - An equity security that performs better during economic contractions than other stocks.
Dodd Frank Act
Dodd Frank Act - Legislation passed in 2010 that established new government agencies to reduce volatility in financial markets in response to the Great Recession.
Exchange Rate Risk
Exchange Rate Risk - The variability in asset returns due to the dynamic nature of currency values.
Financial Institutions
Financial Institutions - An intermediary that helps borrowers raise capital in financial markets and provides a wide range of financial services to all types of investors.
Financial Services Modernization Act
Financial Services Modernization Act - Legislation passed in 1999 that removes barriers among securities firms, financial institutions, and insurance companies.
Firm Commitment
Firm Commitment - A method of raising capital in the primary market in which the underwriting firm agrees to purchase the entire issue from the corporation and attempts to sell all of the securities to the public but can keep any number of securities as inventory.
General Obligation Bond
General Obligation Bond - A bond issued by a municipality for general financing purposes, such as building a school or financing the construction of buildings that improve the services provided by the municipality.
Global Association of Risk Professionals
Global Association of Risk Professionals - The self-regulatory organization that grants the FRM® designation.
Growth Stock
Growth Stock - An equity security that has above average expected growth rates in either earnings per share, operating cash flows, or dividends.
Income Stock
Income Stock - An equity security that is expected to pay higher than average dividends.
Interest Rate Risk
Interest Rate Risk - A systematic risk factor that describes the variability in asset returns due to changes in interest rates.
Interest Rate Sensitive Stock
Interest Rate Sensitive Stock - An equity security that performs well during specific interest rate environments.
Investment Advisers
Investment Advisers - Any person or firm that, for compensation, provides advice to others or issues reports or analyses regarding securities.
Investment Advisers Act
Investment Advisers Act - Legislation passed in 1940 that regulates investment advisers and requires registration with the SEC for firms or any individual advisers with assets under management exceeding $110 million.
Investment Company Act
Investment Company Act - Legislation passed in 1940 that formed the backbone of financial regulation and established the foundation for mutual funds and hedge funds.
Market Risk
Market Risk - A systematic risk factor that describes the variability in asset returns to changes in market conditions.
Mortgage-Backed Security
Mortgage-Backed Security - A fixed-income security that acts like a bond but is supported by the underlying mortgage pool.
Primary Market
Primary Market - The market for newly created financial securities.
Ratings Agency
Ratings Agency - An independent financial organization that evaluates and publishes the level of credit risk for specific bond issues.
Repurchase Agreement
Repurchase Agreement - A contract between two parties in which one party agrees to sell a security to another party with an agreement to repurchase the same security after a short time, usually one day.
Revenue Bond
Revenue Bond - A municipal bond that is issued to finance specific projects that will generate its own revenue stream, such as a toll road.
Roaring 20s
Roaring 20s - The time period after WWI in which there was tremendous economic growth resulting in higher income levels for the middle class. The expansion was characterized by frequent borrowing for household items, automobiles, and eventually shares of stock.
Sarbanes Oxley Act
Sarbanes Oxley Act - Legislation passed in 2002 that established expanded financial regulations in response to the major accounting scandals of late 1990s.
Secondary Market
Secondary Market - The market for securities that have already passed through the primary market. The NYSE is the most famous example of a secondary market.
Securities Act
Securities Act - Legislation passed in 1933 that regulates the offering and sale of securities to ensure more transparency in financial statements.
Securities Exchange Act
Securities Exchange Act - Legislation passed in 1934 that governs secondary market trading and established the Securities and Exchange Commission.
Self-Regulatory Organizations
Self-Regulatory Organizations - Private non-governmental organizations that have limited authority to enforce ethical and fair standards among businesses operating in the financial services industry to protect investors, to promote trust among all market participants, and to improve the efficiency in the flow of capital and information.
Split Rating
Split Rating - A difference of opinion between two of the independent ratings agencies.
Stock Market Crash of 1929
Stock Market Crash of 1929 - A series of consecutive daily stock market crashes that occurred at the end of October in 1929.
Systematic Risk
Systematic Risk - The variability in stock returns due to changes in economic factors.
Transfer Agents
Transfer Agents - Financial institutions that keep track of the ownership of the securities the investing public trades. Treasury Direct - A web-based trading system for the purchase and sale of U.S. Treasury securities.
Treasury Security
Treasury Security - A security issued by the United States Treasury Department for the purpose of financing the federal budget deficit.
Trust Indenture Act
Trust Indenture Act - Legislation passed in 1939 that requires the appointment of suitable trustee for security issues.
Unsystematic Risk
Unsystematic Risk - The variability in stock returns due to changes in firm specific factors.
Value Stock
Value Stock - An equity security with relative valuation characteristics that suggest it is less expensive than other stocks.
