Chapter 2 Flashcards
What are the two main types of financial markets?
- Money markets (short-term, low-risk debt securities)
- Capital markets (longer-term, riskier securities like bonds and stocks)
_____ _________ involves deciding how to distribute investments across different asset classes.
Asset allocation
The money market is a subsector of the fixed-income market, consisting of ________, ___________ & __________ debt securities.
- short-term
- liquid
- low-risk
What are Treasury bills (T-bills)?
T-bills are short-term government debt securities that raise funds by selling bills to the public.
What is a certificate of deposit (CD)?
A CD is a time deposit with a bank that pays interest and has a set maturity date.
What is commercial paper?
Commercial paper is short-term unsecured debt issued by well-known companies.
A ______ is a longer-term debt instrument where the issuer borrows money and pays interest to bondholders over time.
bond
What is a callable bond?
A callable bond allows the issuer to repay the bond before its maturity date, typically during periods of declining interest rates.
______ ______ represents ownership in a corporation and entitles shareholders to voting rights and residual claims on earnings
Common stock
_________ _______ pays fixed dividends and has priority over common stock in terms of dividends and liquidation but generally lacks voting rights.
Preferred stock
What is a price-weighted stock index?
A price-weighted index is an index in which each stock influences the index based on its price (e.g., Dow Jones Industrial Average).
What is a market-value-weighted stock index?
A market-value-weighted index calculates each stock’s impact based on its total market capitalization (e.g., S&P 500).
What is an option in the derivative market?
An option is a contract that gives the holder the right, but not the obligation, to buy or sell an underlying asset at a set price before a specified date.
A ____ ______ gives the buyer the right to purchase an asset at a specified strike price before the option’s expiration date.
call option
What is a put option?
A put option gives the buyer the right to sell an asset at a specified strike price before the option’s expiration date.
What is a futures contract?
A futures contract is an agreement to buy or sell an asset at a predetermined price on a future date.
A ____ _________ is the commitment to buy the underlying asset at the future delivery date.
long position
What is a short position in a futures contract?
A short position is the commitment to sell the underlying asset at the future delivery date.
What are MBS?
MBS (mortgage-backed securities) are securities representing a proportional ownership interest in a pool of mortgages, with cash flows passed through to investor.
What is the difference between common and preferred stock?
Common stock represents ownership with voting rights and residual claims, while preferred stock offers fixed dividends and priority in claims but lacks voting rights.
