Chapter 2 Flashcards
Capital market
All institutions and procedures that facilitate transactions in long-term financial instruments
Angel investor
A wealthy private investor who provides capital for a business start-up
Venture
An investment firm (or individual investor) that provides money to business start-ups
Public offering
A security offering where all investors have the opportunity to acquire a portion of the financial claims being sold
Private placement
A security offering limited to a same number of potential investor
Primary market
A market in which securities are offered for the first time for sale to potential investors.
Initial public offering
The first time a company sells its stock to the public
Seasonal equity offering
The sale of additional stock by company whose shares are already publically traded
Secondary market
A market in which currently outstanding securities are traded
Money market
All institutions and procedures that facilitate transactions in short-term instruments issued by borrowers with very high credit ratings
Future market
Markets where you can by or sell something at a future date
Organized security exchanges
Formal organization that facilitate the trading of security
Over-the-counter markets
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
Investment banker
A financial specialist who underwrites and distributes new securities and advises corporate clients about raising new funds.
Underwriting
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.
Underwriter’s spread
The difference between the price the corporation raising the money gets and the public offering price of a security.
Syndicate
A group of investment bankers who contractually assist in the buying and selling of a new security issue
Privileges subscription
The process of making a new security to a select group of investors.
Dutch auction
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
Direct sale
The sales of securities by a corporation to the investing public without the services of an investment-banking firm
Flotation costs
The transactions cost incurred when a firm raises funds by issuing a particular type of security
Opportunity cost
The next-best rate of return available to the investor for a given level of risk.
Nominal (or quoted) rate of interest
The interest rate paid on debt securities without an adjustment for any loss in purchasing power
Inflation premium
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
Default-risk premium
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
Maturity-risk premium
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
Liquidity-risk premium
The additional return required by investors for securities that cannot be quickly converted into chase at a reasonably predictable price
Real risk-free interest rate
The required rate of return of a fixed-income security that has not risk in an economic environment of zero inflation
Real rate of interest
The nominal (quoted) rate of interest less any loss in purchasing power of the dollar during the time of the investment
Term structure of interest rates
The relationship between interest rates and the term to maturity, where the risk of default is held constant
Yield to maturity
The rate of return a bondholder will receive if the bond is held to maturity
Unbiased expectations
The theory that he shape of the term structure of interest rates is determined by an investor’s expectations about future interest rate
Liquidity preferences theory
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.
Market segmentation theory
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
