Chapter 2

Question 1

What are the two main types of financial markets?

Answer 1

• Money markets (short-term, low-risk debt securities)
• Capital markets (longer-term, riskier securities like bonds and stocks)

Question 2

_____ _________ involves deciding how to distribute investments across different asset classes.

Answer 2

Asset allocation

Question 3

The money market is a subsector of the fixed-income market, consisting of ________, ___________ & __________ debt securities.

Answer 3

• short-term
• liquid
• low-risk

Question 4

What are Treasury bills (T-bills)?

Answer 4

T-bills are short-term government debt securities that raise funds by selling bills to the public.

Question 5

What is a certificate of deposit (CD)?

Answer 5

A CD is a time deposit with a bank that pays interest and has a set maturity date.

Question 6

What is commercial paper?

Answer 6

Commercial paper is short-term unsecured debt issued by well-known companies.

Question 7

A ______ is a longer-term debt instrument where the issuer borrows money and pays interest to bondholders over time.

Answer 7

bond

Question 8

What is a callable bond?

Answer 8

A callable bond allows the issuer to repay the bond before its maturity date, typically during periods of declining interest rates.

Question 9

______ ______ represents ownership in a corporation and entitles shareholders to voting rights and residual claims on earnings

Answer 9

Common stock

Question 10

_________ _______ pays fixed dividends and has priority over common stock in terms of dividends and liquidation but generally lacks voting rights.

Answer 10

Preferred stock

Question 11

What is a price-weighted stock index?

Answer 11

A price-weighted index is an index in which each stock influences the index based on its price (e.g., Dow Jones Industrial Average).

Question 12

What is a market-value-weighted stock index?

Answer 12

A market-value-weighted index calculates each stock’s impact based on its total market capitalization (e.g., S&P 500).

Question 13

What is an option in the derivative market?

Answer 13

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.

Question 14

A ____ ______ gives the buyer the right to purchase an asset at a specified strike price before the option’s expiration date.

Answer 14

call option

Question 15

What is a put option?

Answer 15

A put option gives the buyer the right to sell an asset at a specified strike price before the option’s expiration date.

Question 16

What is a futures contract?

Answer 16

A futures contract is an agreement to buy or sell an asset at a predetermined price on a future date.

Question 17

A ____ _________ is the commitment to buy the underlying asset at the future delivery date.

Answer 17

long position

Question 18

What is a short position in a futures contract?

Answer 18

A short position is the commitment to sell the underlying asset at the future delivery date.

Question 19

What are MBS?

Answer 19

MBS (mortgage-backed securities) are securities representing a proportional ownership interest in a pool of mortgages, with cash flows passed through to investor.

Question 20

What is the difference between common and preferred stock?

Answer 20

Common stock represents ownership with voting rights and residual claims, while preferred stock offers fixed dividends and priority in claims but lacks voting rights.