Chapter 4 Asset Markets

Question 1

assets such as land, coal mines, office buildings, inventories in stores, goods in process of production, and publicly owned assets, which can be seen and touched

Answer 1

real assets

**All real assets have an owner

Question 2

assets such as pieces of paper like currency, bank deposits, bonds, cash values of life insurance policies and shares that represent real assets

Answer 2

financial assets

Question 3

the market in which the attributes of the assets are homogenized, like pounds of copper or gallons of heating oil or 30 year US govt bonds

Answer 3

wholesale market

Question 4

the market in which the attributes of the asset are variegated, so that the units traded are less than perfect substitutes for each other

Answer 4

retail market

Question 5

US govt bonds, foreign currencies, and the shares of 6,000 private firms are traded in this market

Answer 5

over-the-counter or telephone market

Question 6

corporate shares and futures contracts in commodities and in securities are traded in this market, typified by the New York Stock Exchange (NYSE) and the Chicago Board of Trade

Answer 6

auction market

Question 7

What is the dominant characteristic of auction markets?

Answer 7

the trading rules are precisely specified

Question 8

What practice involves the representatives of the buyers and the representatives of the sellers meeting at a particular location such as a trading desk or a trading pit and loudly announcing the price they are prepared to pay or the price at which they will sell, until a deal is struck? **This also represents a second characteristic of auction markets

Answer 8

open-outcry

Question 9

What is the dominant characteristic of the over-the-counter market?

Answer 9

that buyers and sellers communicate by phone or by computer, frequently with the assistance of brokers

Question 10

What is the market for demand deposits denominated in the US dollar, the Canadian dollar, the German mark, the Japanese yen, and most other currencies? It is also the largest market in the world in terms of the volume of daily trading. It is also a primarily over-the-counter market

Answer 10

foreign-exchange market

Question 11

transactions in foreign exchange requiring payment within two days

Answer 11

spot transactions

Question 12

transactions with deferred payments, usually 30, 60, 90, or 180 days after the date of contract

Answer 12

forward transactions

Question 13

Why do banks, life insurance companies, and other financial institutions trade securities extensively?

Answer 13

in an attempt to increase their total return

Question 14

What is the key feature of state and local bonds?

Answer 14

the interest income on these bonds is not subject to federal income tax

Question 15

this type of bond is based only on the income of specified toll roads, airports, power-producing facilities, and other revenue-producing units of the government

Answer 15

revenue bond

Question 16

this type of bond is based on the full taxing power of the governments and is a state and local government security

Answer 16

general obligation bond

Question 17

this type of bond is used to finance the development and construction of factory sites

Answer 17

industrial development bond

Question 18

this type of bond is the riskiest of all bonds, goes in and out of vogue in phase with the surges in corporate takeovers; this bond is usually not rated by a rating agency, is usually backed by a firm’s investment bank, and because of its high risk, pays very high interest

Answer 18

junk bond

**they are not necessarily a bad investment; their higher yield may make them a better instrument than a AAA bond for those who can stomach the risk

Question 19

a derivative of an original bond that is a security whose interest payments change along with the interest rates on newly issued securities

Answer 19

floater

Question 20

a derivative of an original bond that is a security whose interest payment goes down when market interest rates rise, and vice versa (also called inverse)

Answer 20

reverse floater

Question 21

this type of derivative (option) gives you the right–but not the obligation–to purchase a specific amount of a stock at a fixed price on a particular day

Answer 21

call option

Question 22

the fixed price of an option

Answer 22

strike price

Question 23

Suppose the current price of common stock in Chipotle is $9 and you buy this type of option with a strike price of $10. If three months from today Chipotle stock trades for $12, you can buy a specific amount of this stock at $10 and make a tidy profit by reselling it at $12. You are therefore willing to pay a certain amount of money to someone who will sell you this type of option. You may, of course, lose all you pay, because if three months from today the stock sells for $9, your right to buy it at $10 is worth nothing. What is this type of option?

Answer 23

call option

Question 24

this type of derivative (option) gives you the right–but not the obligation–to sell a security at a fixed price on a particular date

Answer 24

put option

Question 25

Suppose you hold a stock currently selling for $20, but you are afraid that its price may fall sharply. You may not want to sell it because there is also a chance that its price may rise precipitously. By buying this type of option that allows you to sell the stock, say on October 1 at $17, you can hedge your risk once since you can lose no more than $3 a share on the stock. You do, however, have to pay someone to enter into such a contract, and if the price of the stock does not fall below $17 on the strike date, you will lose what you paid for this type of option. Name this type of option

Answer 25

put option

Question 26

What type of risk is the likelihood of a change in interest rates on long-term securities relative to the interest rates on short-term securities?

Answer 26

market risk