Chapter 3

Question 1

Interest-Bearing Assets

Answer 1

1) Value of the asset depends on interest rates

2) Major subtypes = money market instruments, fixed-income securities

Question 2

Money Market Instruments

Answer 2

1) Essentially IOU’s sold by large corporatoins or governments to borrow money
2) mature in less than one year from the time they are sold (loan must be repaid within one year)
3) made in very large donations and most are quiite liquid
4) simplest form of interest-bearing asset
5) t-bills, CD’s

Question 3

Treasury bills

Answer 3

1) most familiar money market instrument
2) sold on discount
3) Most liquid MMI

Question 4

Fixed-income securities

Answer 4

1) long-term debt obligatons, often of corps and govts, that promise to make fixed pmts according to a preset schedule
2) ex. bonds

Question 5

Current yield

Answer 5

= annual coupon/ current bond price

Question 6

Equities

Answer 6

1) common stock - ownerhsip in a corporation
- dividends
- market and company fluctuation
2) preferred stock
- fixed dividend
- paid first (in default)
- not a debt obligation

Question 7

Primary Asset

Answer 7

1) security originally sold by a business or government to raise money

Question 8

Derivitive Asset

Answer 8

!) A Financial asset that is derived from an existing traded asset rather than issued by a business or govt.
- any financial asset that is not primary

Question 9

Option Contract

Answer 9

1) gives owner the right but not the obligation to sell/buy an asset a set price for a set time
2) subject to option premium
3) strike price/ excercies price = price underlying asset can be bought/sold at

Question 10

Call Option

Answer 10

1) gives owner the right to buy an asser

Question 11

Put option

Answer 11

gives owner the right to sell an asset

Question 12

bid price

Answer 12

price you will receive if you sell at current market price

Question 13

ask price

Answer 13

price you pay if you buy at current market price