Chapter 2 - asset classes and financial instruments

Question 1

treasury bills

Answer 1

• 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

Question 2

certificate of deposit

Answer 2

• a bank time deposit
• Denominations larger than $100,000

Question 3

commerical paper

Answer 3

• Short-term unsecured debt issued by large corporations
• Up to 270 days
• Multiples of $100,000

Question 4

banker’s acceptance

Answer 4

• 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

Question 5

eruodollars

Answer 5

• Dollar-denominated deposits at foreign banks or foreign branches of American banks
• Mostly less than 6-month maturity

Question 6

repurchasing agreements (repos)

Answer 6

• Short-term sales of securities with an agreement to repurchase the securities at a higher price
• Usually overnight

Question 7

term repurchasing agreement (term repo)

Answer 7

term of the implicit loan can be 30 days or more

Question 8

reverse repurchasing agreement (reverse repo)

Answer 8

dealer finds an investor holding government securities and buys them with an agreement to resell them at a specified higher price

Question 9

broker’s calls

Answer 9

• 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

Question 10

broker’s calls

Answer 10

• 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

Question 11

federal funds

Answer 11

• 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

Question 12

London interbank offer rate (LIBOR)

Answer 12

Lending rate among banks in the London market

Question 13

Treasury notes (T notes)

Answer 13

Debt obligations of the federal government with original maturities ranging up to 10 years

Question 14

treasury bonds (T bonds)

Answer 14

Debt obligations of the federal government with original maturities ranging from 10 to 30 years

Question 15

coupon payments

Answer 15

semiannual interest payments

Question 16

inflation-protected treasury bonds (TIPS)

Answer 16

the principal amount on these bonds is adjusted in proportion to increases in the consumer price index

Question 17

municipal bonds

Answer 17

• Tax-exempt bonds issued by state and local governments
• Must pay capital gains taxes
• maturities range up to 30 years

Question 18

general obligation bonds

Answer 18

backed by the “full faith and credit” of the issuer

Question 19

revenue bonds

Answer 19

issued to finance particular projects and are backed either by the revenues from that projects or by the municipal agency operating the project

Question 20

corporate bonds

Answer 20

Long-term debt issued by private corporations typically pays semiannual coupons and returns the face value of the bond at maturity

Question 21

debentures

Answer 21

zero collateral bonds

Question 22

subordinated debentures

Answer 22

have a lower priority claim to the firm’s assets in the event of bankruptcy

Question 23

callable bonds

Answer 23

give the firm the option to repurchase the bond from the holder at a stipulated call price

Question 24

convertible bonds

Answer 24

give the bondholder the right to convert each bond into a stipulated number of shares of stock

Question 25

common stock

Answer 25

• Ownership shares in a publicly held corporation
• Shareholders have voting rights and may receive dividends

Question 26

residual claim

Answer 26

stockholders are the last in line of all those who have a claim on the assets and income of the corporation

Question 27

limited liability

Answer 27

the most shareholders can lose in the event of the failure of the corporation is their original investment

Question 28

preferred stock

Answer 28

• Non-Voting shares in a corporation, usually paying a fixed stream of dividends
• Dividends are taxed

Question 29

American depository receipts

Answer 29

certificates traded in US markets that represent ownership in shares of a foreign company

Question 30

Dow Jones industrial average

Answer 30

• 30 large-cap, “blue-chip” corporations
• Price-weighted average

Question 31

Dow Jones industrial average

Answer 31

• 30 large-cap, “blue-chip” corporations
• Price-weighted average

Question 32

price-weighted average

Answer 32

An average computed by adding the prices of the stocks and dividing by a “divisor”

Question 33

Standard & poor’s 500 Index

Answer 33

• 500 largest market cap companies traded on US stock exchanges
• market value-weighted index

Question 34

market value-weighted index

Answer 34

Index return equals the weighted average of the returns of each component security, with weights proportional to outstanding market value

Question 35

equally weighted index

Answer 35

An index computed from a simple average of returns

Question 36

Japan stock exchange

Answer 36

Nikkei

Question 37

United Kingdom stock exchange

Answer 37

FTSE

Question 38

Germany stock exchange

Answer 38

DAX

Question 39

Hong Kong stock exchange

Answer 39

Hang Seng

Question 40

Toronto stock exchange

Answer 40

TSX

Question 41

call option

Answer 41

The right to buy an asset at a specified exercise/strike price on or before a specified expiration date

Question 42

put option

Answer 42

The right to sell an asset at a specified exercise price on or before a specified expiration date

Question 43

futures contracts

Answer 43

Obliges traders to purchase or sell an asset at an agreed-upon price at a specified future date