Chapter 4 Asset Markets Flashcards
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
real assets
**All real assets have an owner
assets such as pieces of paper like currency, bank deposits, bonds, cash values of life insurance policies and shares that represent real assets
financial assets
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
wholesale market
the market in which the attributes of the asset are variegated, so that the units traded are less than perfect substitutes for each other
retail market
US govt bonds, foreign currencies, and the shares of 6,000 private firms are traded in this market
over-the-counter or telephone market
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
auction market
What is the dominant characteristic of auction markets?
the trading rules are precisely specified
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
open-outcry
What is the dominant characteristic of the over-the-counter market?
that buyers and sellers communicate by phone or by computer, frequently with the assistance of brokers
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
foreign-exchange market
transactions in foreign exchange requiring payment within two days
spot transactions
transactions with deferred payments, usually 30, 60, 90, or 180 days after the date of contract
forward transactions
Why do banks, life insurance companies, and other financial institutions trade securities extensively?
in an attempt to increase their total return
What is the key feature of state and local bonds?
the interest income on these bonds is not subject to federal income tax
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
revenue bond
this type of bond is based on the full taxing power of the governments and is a state and local government security
general obligation bond
this type of bond is used to finance the development and construction of factory sites
industrial development bond
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
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
a derivative of an original bond that is a security whose interest payments change along with the interest rates on newly issued securities
floater
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)
reverse floater
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
call option
the fixed price of an option
strike price
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?
call option
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
put option
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
put option
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?
market risk
