Chapter 2 - asset classes and financial instruments Flashcards
treasury bills
- Short-term government securities issued at a discount from face value and returning the face amount at maturity
- Federally taxed, exempt from state and local taxes
- maturity less than 1 year
certificate of deposit
- a bank time deposit
- Denominations larger than $100,000
commerical paper
- Short-term unsecured debt issued by large corporations
- Up to 270 days
- Multiples of $100,000
banker’s acceptance
- An order to a bank by a customer to pay a sum of money at a future date
- Typically within 6 months
- Sell at a discount from the face value of the payment order
eruodollars
- Dollar-denominated deposits at foreign banks or foreign branches of American banks
- Mostly less than 6-month maturity
repurchasing agreements (repos)
- Short-term sales of securities with an agreement to repurchase the securities at a higher price
- Usually overnight
term repurchasing agreement (term repo)
term of the implicit loan can be 30 days or more
reverse repurchasing agreement (reverse repo)
dealer finds an investor holding government securities and buys them with an agreement to resell them at a specified higher price
broker’s calls
- the investor who buys stock on margin borrow part of the funds from their broker
- Broker in turn may borrow funds from the bank
- Agreeing to repay the bank immediately (on call) if the bank requests it
broker’s calls
- the investor who buys stock on margin borrows part of the funds from their broker
- Broker in turn may borrow funds from the bank
- Agreeing to repay the bank immediately (on call) if the bank requests it
federal funds
- Funds in the accounts of commercial banks at the Federal Reserve Bank
- Banks with excess funds lend to those with a shortage
- Usually overnight transactions
- Arranged at the federal funds rate
London interbank offer rate (LIBOR)
Lending rate among banks in the London market
Treasury notes (T notes)
Debt obligations of the federal government with original maturities ranging up to 10 years
treasury bonds (T bonds)
Debt obligations of the federal government with original maturities ranging from 10 to 30 years
coupon payments
semiannual interest payments
inflation-protected treasury bonds (TIPS)
the principal amount on these bonds is adjusted in proportion to increases in the consumer price index
municipal bonds
- Tax-exempt bonds issued by state and local governments
- Must pay capital gains taxes
- maturities range up to 30 years
general obligation bonds
backed by the “full faith and credit” of the issuer
revenue bonds
issued to finance particular projects and are backed either by the revenues from that projects or by the municipal agency operating the project
corporate bonds
Long-term debt issued by private corporations typically pays semiannual coupons and returns the face value of the bond at maturity
debentures
zero collateral bonds
subordinated debentures
have a lower priority claim to the firm’s assets in the event of bankruptcy
callable bonds
give the firm the option to repurchase the bond from the holder at a stipulated call price
convertible bonds
give the bondholder the right to convert each bond into a stipulated number of shares of stock
common stock
- Ownership shares in a publicly held corporation
- Shareholders have voting rights and may receive dividends
residual claim
stockholders are the last in line of all those who have a claim on the assets and income of the corporation
limited liability
the most shareholders can lose in the event of the failure of the corporation is their original investment
preferred stock
- Non-Voting shares in a corporation, usually paying a fixed stream of dividends
- Dividends are taxed
American depository receipts
certificates traded in US markets that represent ownership in shares of a foreign company
Dow Jones industrial average
- 30 large-cap, “blue-chip” corporations
- Price-weighted average
Dow Jones industrial average
- 30 large-cap, “blue-chip” corporations
- Price-weighted average
price-weighted average
An average computed by adding the prices of the stocks and dividing by a “divisor”
Standard & poor’s 500 Index
- 500 largest market cap companies traded on US stock exchanges
- market value-weighted index
market value-weighted index
Index return equals the weighted average of the returns of each component security, with weights proportional to outstanding market value
equally weighted index
An index computed from a simple average of returns
Japan stock exchange
Nikkei
United Kingdom stock exchange
FTSE
Germany stock exchange
DAX
Hong Kong stock exchange
Hang Seng
Toronto stock exchange
TSX
call option
The right to buy an asset at a specified exercise/strike price on or before a specified expiration date
put option
The right to sell an asset at a specified exercise price on or before a specified expiration date
futures contracts
Obliges traders to purchase or sell an asset at an agreed-upon price at a specified future date
