Chapter 2 Flashcards
All institutions and procedures that facilitate transactions in long-term financial instruments
Capital Markets
A wealthy private investor who provides capital for a business start-up
Angel Investor
An investment firm (or individual investor) that provides money to business start-ups
Venture Capitalist
A security offering where all investors have the opportunity to acquire a portion of the financial claims being sold
Public Offering
A security offering limited to a small number of potential investors
Private Placement
A market where securities are offered for the first time for sale to potential investors
Primary Market
The first time a company sells its stock to the public
Initial Public Offering (IPO)
The sale of additional stock by a company whose shares are already publicly traded
Seasoned Equity Offering (SEO)
A market where currently outstanding securities are traded
Secondary Market
All institutions and procedures that facilitate transactions in short-term instruments issued by borrowers with very high credit ratings
Money Market
Cash Market
Spot Market
Markets where you can buy or sell something at a future date
Futures Market
Formal organizations that facilitate the trading of securities
Organized Security Exchanges
All security markets except the organized exchanges ie. the money market and most corporate bonds
Over-the-Counter Markets
A financial specialist who underwrites and distributes new securities and advises corporate clients about raising new funds
Investment Banker
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
Underwriting
The difference between the price the corporation raising the money gets and the public offering price of a security
Underwriter’s Spread
A group of investment bankers who contractually asset in the buying and selling of a new security issue
Syndicate
The process of marketing a new security to a select group of investors
Privileged Subscription
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
Dutch Auction
The sale of securities by a corporation to the investing public without the services of an investment-banking firm
Direct Sale
The transaction cost incurred when a firm raises funds by issuing a particular type of security
Flotation Cost
The next-best rate of return available to the investor for a given level of risk
Opportunity Cost of Funds
The interest rate paid on debt securities without an adjustment for any loss in purchasing power
Nominal Rate of Interest
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
Inflation 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 on the same maturity and marketability
Default-Risk Premium
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
Maturity-risk Premium
The additional return required by investors for securities that cannot be quickly converted into cash at a reasonably predictable price
Liquidity-risk Premium
The required rate of return on fixed-income security that has no risk in an economic environment of zero inflation
Real Risk-Free Interest Rate
The nominal rate of interest less any loss in purchasing power of the dollar during the time of investment
Real Rate of Interest
The relationship between interest rates and the term to maturity, where the risk of default is held constant
Term Structure of Interest Rates
The rate of return a bondholder will receive if the bond is held to maturity
Yield to Maturity
The theory that the shape of the term structure of the interest rate is determined by an investor’s expectations about future interest rates
Unbiased Expectation 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 risk
Liquidity Preference Theory
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
Market Segmentation Theory
