Chapter 2

Question 1

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

Answer 1

Capital Markets

Question 2

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

Answer 2

Angel Investor

Question 3

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

Answer 3

Venture Capitalist

Question 4

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

Answer 4

Public Offering

Question 5

A security offering limited to a small number of potential investors

Answer 5

Private Placement

Question 6

A market where securities are offered for the first time for sale to potential investors

Answer 6

Primary Market

Question 7

The first time a company sells its stock to the public

Answer 7

Initial Public Offering (IPO)

Question 8

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

Answer 8

Seasoned Equity Offering (SEO)

Question 9

A market where currently outstanding securities are traded

Answer 9

Secondary Market

Question 10

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

Answer 10

Money Market

Question 11

Cash Market

Answer 11

Spot Market

Question 12

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

Answer 12

Futures Market

Question 13

Formal organizations that facilitate the trading of securities

Answer 13

Organized Security Exchanges

Question 14

All security markets except the organized exchanges ie. the money market and most corporate bonds

Answer 14

Over-the-Counter Markets

Question 15

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

Answer 15

Investment Banker

Question 16

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

Answer 16

Underwriting

Question 17

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

Answer 17

Underwriter’s Spread

Question 18

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

Answer 18

Syndicate

Question 19

The process of marketing a new security to a select group of investors

Answer 19

Privileged Subscription

Question 20

A method of issuing securities (common stock) where the investors place bids indicating how many shares 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 all the available shares

Answer 20

Dutch Auction

Question 21

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

Answer 21

Direct Sale

Question 22

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

Answer 22

Flotation Cost

Question 23

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

Answer 23

Opportunity Cost of Funds

Question 24

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

Answer 24

Nominal Rate of Interest

Question 25

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

Answer 25

Inflation Premium

Question 26

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 on the same maturity and marketability

Answer 26

Default-Risk Premium

Question 27

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

Answer 27

Maturity-risk Premium

Question 28

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

Answer 28

Liquidity-risk Premium

Question 29

The required rate of return on fixed-income security that has no risk in an economic environment of zero inflation

Answer 29

Real Risk-Free Interest Rate

Question 30

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

Answer 30

Real Rate of Interest

Question 31

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

Answer 31

Term Structure of Interest Rates

Question 32

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

Answer 32

Yield to Maturity

Question 33

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

Answer 33

Unbiased Expectation Theory

Question 34

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 risk

Answer 34

Liquidity Preference Theory

Question 35

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

Answer 35

Market Segmentation Theory