Chapter 2 Flashcards
What are the features of common stock?
Limited liability, voting rights as well as residual claim
What are the features a preferred stock
Non-voting, priority, over common stock in the case of liquidation, cumulative, not tax-deductible to firms however, if they receive dividends, then there are corporate tax exclusion on 50%
How is the Dow Jones industrial average weighted?
Price weighted
How do you find the value of a price weighted index?
The sum of all prices over the amount of stocks within the index
What is the value of an option upon expiration?
It is equal only two intrinsic value as time value is irrelevant at expiration
What are the possible maturities of T-bills?
4 weeks, 13 weeks, 26 weeks, and 52 weeks
If you were calculating a bank discount rate, how many days a year are you using?
360
What is the maximum time till maturity for commercial paper?
270 days
What is the difference between the federal funds rate and LIBOR
LIBOR is the rate at which large banks in London, are willing to lend money among each other in the federal funds rate is the rate of interest on a very short term loans amongst financially institutions in the USA
Why may high tax bracket investors prefer municipal bonds over T-bills?
Because municipal bonds are exempt from both federal and state and local taxes 
What is a municipal revenue bond?
Municipal bond, that finance projects, and the payment of the bond are backed by the revenue of the project or the municipal agency issuing
What is a general obligation municipal bond?
What is a bond that is backed by the full faith of the issuer often through tax revenue
What are the benefits of options?
Allow for risk reduction, allowed to target, a variety of investment objectives, another way of market implementation of analysis, income generation, leverage, stock acquisition
When an option is exercise, what is delivered?
Only the intrinsic value
