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FIN 5210: Managerial Finance > Chapter 2: The Financial Markets and Interest Rates > Flashcards

Chapter 2: The Financial Markets and Interest Rates Flashcards

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1
Q

Capital Markets

A

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

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2
Q

Angel Investor

A

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

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3
Q

Venture Capitalist

A

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

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4
Q

Public Offering

A

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

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5
Q

Private Placement

A

A security offering limited to a small number of potential investors.

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6
Q

Primary Market

A

A market in which securities are offered for the first time for sale to potential investors.

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7
Q

Initial Public Offering (IPO)

A

The first time a company sells its stock to the public.

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8
Q

Seasoned Equity Offering (SEO)

A

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

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9
Q

Secondary Market

A

A market in which currently outstanding securities are traded.

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10
Q

Money Market

A

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

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11
Q

Spot Market

A

Cash market

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12
Q

Futures Market

A

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

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13
Q

Organized Security Exchanges

A

Formal organizations that facilitate the trading of securities.

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14
Q

Over-the-Counter Markets

A

All security markets except the organized exchanges. The money market is an over-the-counter market. Most corporate bonds also are traded in the over-the-counter market.

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15
Q

Investment Banker

A

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

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16
Q

Underwriting

A

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

17
Q

Underwriter’s Spread

A

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

18
Q

Syndicate

A

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

19
Q

Privileged Subscription

A

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

20
Q

Dutch Auction

A

A method of issuing securities (common stock) by which investors place bids indicating how many shares they are willing to buy and at what price. The price the stock is then sod for becomes the lowest price at which the issuing company can sell all the available shares.

21
Q

Direct Sale

A

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

22
Q

Flotation Costs

A

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

23
Q

Opportunity Cost of Funds

A

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

24
Q

Nominal (or Quoted) Rate of Interest

A

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

25
Q

Inflation Premium

A

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.

26
Q

Default-Risk Premium

A

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 of the same maturity and marketability.

27
Q

Maturity-Risk Premium

A

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

28
Q

Liquidity-Risk Premium

A

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

29
Q

Real Risk-Free Interest Rate

A

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

30
Q

Real Rate of Interest

A

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

31
Q

Term Structure of Interest Rates

A

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

32
Q

Yield to Maturity

A

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

33
Q

Unbiased Expectations Theory

A

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

34
Q

Liquidity Preference Theory

A

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 risks.

35
Q

Market Segmentation Theory

A

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.

36
Q

Nominal Interest Rate

A

Equals real risk-free interest rate + inflation premium + default-risk premium + maturity-risk premium + liquidity-risk premium

37
Q

Nominal Interest Rate

A

Approximately equals real rate of interest + inflation-risk premium

38
Q

1 + Nominal Interest Rate

A

Equals (1 + real rate of interest)(1 + rate of inflation)

39
Q

Nominal or Quoted Rate of Interest

A

Equals real rate of interest + inflation rate + product of the real rate of interest and the inflation rate.

FIN 5210: Managerial Finance (7 decks)

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