Chapter 2

Question 1

Capital market

Answer 1

All institutions and procedures that facilitate transactions in long-term financial instruments

Question 2

Angel investor

Answer 2

A wealthy private investor who provides capital for a business start-up

Question 3

Venture

Answer 3

An investment firm (or individual investor) that provides money to business start-ups

Question 4

Public offering

Answer 4

A security offering where all investors have the opportunity to acquire a portion of the financial claims being sold

Question 5

Private placement

Answer 5

A security offering limited to a same number of potential investor

Question 6

Primary market

Answer 6

A market in which securities are offered for the first time for sale to potential investors.

Question 7

Initial public offering

Answer 7

The first time a company sells its stock to the public

Question 8

Seasonal equity offering

Answer 8

The sale of additional stock by company whose shares are already publically traded

Question 9

Secondary market

Answer 9

A market in which currently outstanding securities are traded

Question 10

Money market

Answer 10

All institutions and procedures that facilitate transactions in short-term instruments issued by borrowers with very high credit ratings

Question 11

Future market

Answer 11

Markets where you can by or sell something at a future date

Question 12

Organized security exchanges

Answer 12

Formal organization that facilitate the trading of security

Question 13

Over-the-counter markets

Answer 13

All security markets except the organized exchange. The money market is an over-the-counter market. Most corporate bonds also are traded in the over-the-counter market

Question 14

Investment banker

Answer 14

A financial specialist who underwrites and distributes new securities and advises corporate clients about raising new funds.

Question 15

Underwriting

Answer 15

The purchase and subsequent resale of a new security issues. The risk of selling the new issue at a satisfactory (profitable) price is assumed (underwritten) by the investment banker.

Question 16

Underwriter’s spread

Answer 16

The difference between the price the corporation raising the money gets and the public offering price of a security.

Question 17

Syndicate

Answer 17

A group of investment bankers who contractually assist in the buying and selling of a new security issue

Question 18

Privileges subscription

Answer 18

The process of making a new security to a select group of investors.

Question 19

Dutch auction

Answer 19

A method of issuing securities (common stock) by which investors place bids indicating how many share they are willing to buy and at what price. The price the stock is then sold for becomes the lowest price at which the issuing company can sell the available shares

Question 20

Direct sale

Answer 20

The sales of securities by a corporation to the investing public without the services of an investment-banking firm

Question 21

Flotation costs

Answer 21

The transactions cost incurred when a firm raises funds by issuing a particular type of security

Question 22

Opportunity cost

Answer 22

The next-best rate of return available to the investor for a given level of risk.

Question 23

Nominal (or quoted) rate of interest

Answer 23

The interest rate paid on debt securities without an adjustment for any loss in purchasing power

Question 24

Inflation premium

Answer 24

A premium to compensate for anticipated inflation that is equal to the price change expected to occur over the life of the bond or investment instrument

Question 25

Default-risk premium

Answer 25

The additional return required by investors to compensate them for the risk of default. it is calculated as the difference between a U.S. Treasury bond and a corporate bond of the same maturity and marketability

Question 26

Maturity-risk premium

Answer 26

The additional return required by investors in longer-term securities to compensate them for greater risk of price fluctuations on those securities caused by interest rate changes

Question 27

Liquidity-risk premium

Answer 27

The additional return required by investors for securities that cannot be quickly converted into chase at a reasonably predictable price

Question 28

Real risk-free interest rate

Answer 28

The required rate of return of a fixed-income security that has not risk in an economic environment of zero inflation

Question 29

Real rate of interest

Answer 29

The nominal (quoted) rate of interest less any loss in purchasing power of the dollar during the time of the investment

Question 30

Term structure of interest rates

Answer 30

The relationship between interest rates and the term to maturity, where the risk of default is held constant

Question 31

Yield to maturity

Answer 31

The rate of return a bondholder will receive if the bond is held to maturity

Question 32

Unbiased expectations

Answer 32

The theory that he shape of the term structure of interest rates is determined by an investor’s expectations about future interest rate

Question 33

Liquidity preferences theory

Answer 33

The theory that the shape of the term structure of interest rates is determined by an investor’s additional required interest rate in compensation for additional risks.

Question 34

Market segmentation theory

Answer 34

The theory that the shape of the term structure of interest rates implies that he rate of interest for particular maturity is determined solely by demand and supply for a give maturity. This rate is independent of the demand and supply for securities having different maturities