Chapter 2

Question 1

asset-backed securities

Answer 1

bonds or notes backed by financial assets like credit card receivables or auto loans

Question 2

process in creating ABS

Answer 2

fin insutitions that make the loans turn them into marketable securities via securitization. institutions sell the pools to the special purpose vehical (SPV) who sell it to a trust who repackages the loans as interset bearing and issues them

Question 3

CDOs

Answer 3

structured abs paying cash flows to investors in a predetermined sequence, based on how much cash flow is collected from the package of assets. it repackages individual FI assets and divides it up and sell them in pieces on secondary market

Question 4

which tranches in CDOs are the safest

Answer 4

senior tranches in a CDO are safer than junior tranches b/c thy have first clain on the collateral in case of a defult and b/c they have a higher claim on any interest payments

Question 5

money market instruments

Answer 5

debt securities maturing in one year or less

Question 6

commerial paper

Answer 6

when corps borrow short term

Question 7

CDs pay simple or compund interest?

Answer 7

compound

Question 8

what are the advantages of owning common stock?

Answer 8

limited liability – business entity is separate from owners. if business goes bankrupt, creditors cannot come after the assets of shareholders

Question 9

common stock: statutory voting

Answer 9

shareholder allow to cast no more votes for any candidates than the number of shares he owns. ex. you have 100 shrs then you can cast 100 votes but you cannot give all votes to one person

Question 10

cumulative voting

Answer 10

shr-holder can abstain to one person. good for electing a pro-minority person

Question 11

subscription rights

Answer 11

it makes sure the pre-existing shareholder can still maintain their current ownership of company. ex if owner own 5% but comp issue more stock then the owner is given sub rights that act like coupons where the owner can buy the security for less

Question 12

ADR

Answer 12

american depsitory receipt, allows an American to buy stock in a foregin company. so investors can trrade the stock in US curreny

Question 13

ADR risk

Answer 13

foreign currency risk or currency exchange risk, the risk is if the dollar strengthens vs the foreign currency

Question 14

when is it a good time to hold a ADR

Answer 14

when the US dollar is weak than foreign curreny

Question 15

restricted stock

Answer 15

there’s an agreement between issuer and holder saying that he will not sell until holding period expires

Question 16

SEC Rule 144

Answer 16

it provides a safe way to sell restricted stock

Question 17

preferred stock

Answer 17

equity that pays fixed income to the investors. income is less reliable than bonds.