Exam 1 Flashcards
The current commitment of money or other resources in the expection of reaping future benefits.
Investment
Assets used to produce goods and services.
Real assets
Claims on real assets or the income generated by them.
Financial assets
Fixed-income (debt) securities
Pay a specified cash flow over a specified period.
U.S. Treasury bills or bank CDs
An ownership in a corporation.
Equity
Securities providing payoffs that depend on the values of other assets.
Derivative securities
How is the net wealth of the economy measured?
The sum of Real Assets
How does investing affect consumption?
Alters it to a later date
Define in your own words “investing”
using assets to generate more assets
Why is the net wealth of the economy the sum of only Real Assets?
The owners & sellers of financial assets cancel out in the net economy wealth
What are 3 types of financial assets? and examples…
- Debt: bonds, money market instruments
- Equity: common stock, preferred stock
- Derivative securities: values derived from the prices of other assets
Conflicts of interest between managers and stockholders.
agency problems
List 4 mechanisms that have evolved to mitigate potential agency problems.
- Tying income of managers to success of the firm
- Board of directors forcing out underperforming mangers
- Outsiders such as security analysts and institutional investors
- The threat of a take over
What is the top down investment process?
- Asset allocation (% of money invested in different asset classes such as stock, bonds, ect.)
- Security selection (selecting individual securities from each class)
What is the primary determinant of a portfolio’s returns and volatility?
asset allocation
Higher risk is associated with what?
Higher expected returns
Must believe that there is a degree of inefficiency. Focused on finding undervalued securities to purchase or overvalued securities to sell. Engaged in timing strategies, which are focused on asset allocation.
Active investment management
Firm believer that the markets are efficient. (Purchase index mutual funds)
Passive investment management
Institutions that “connect” borrowers and lenders by accepting funds from lenders and loaning funds to borrowers.
Financial intermediaries (banks, investment companies, insurance companies, and credit unions)
Firms managing funds for investors.
Investment companies
A market in which new issues of securities are offered to the public.
Primary market
previously issued securities are traded among investors.
secondary market
Tendency toward a worldwide investment environment, and the integration of international capital markets.
globalization
Pooling loans into standardized securities backed by those loans, which can then be traded like any other security. The loan payments are used as collateral. Institutions purchase the new securities which allows the loan credit risk to be spread out to many institutions.
Securitization
The creation of new securities either by combining primitive and derivative securities into one composite hybrid or by separating returns on an asset into classes.
financial engineering
How are cash flows form bonds financially engineered?
Unbundle cash flows from bonds by separating principal and interest payments
What are two facts about computer trading?
- The wealth of info online allows for computer trading
- It has drastically lower commission fees.
(Wall Street’s profit margins dropped due to decreased fee income)
What is an ECN?
Electronic communication network
Include short-term, highly liquid, and relatively low-risk debt instruments. (minimum denomination is usual $10,000)
Money markets
Short-term government securities issued at a discount from face value and returning the face amount at maturity.
Treasury bills (usually sold in denominations of $10K)(can be purchased on secondary market or directly from the treasury)
What are the maturities of treasury bills?
4, 13, 26, 52
Over what denominations are CDs marketable/negotiable?
$100,000
Short-term unsecured debt issued by large highly rated corporations and financial institutions.
commercial paper
-100K minimum denomination
How long can commercial paper be issued for?
30-60 days and up to 270 days
An order to a bank by a customer to pay a sum of money at a future date.
Bankers acceptance
Short-term sales of government securities with an agreement to repurchase the securities at a higher price on an overnight basis.
repurchase agreement (REPO)
The dealer finds an investor holding government securities and buys them with an agreement to resell them at a specified higher price on a future date.
Reverse repurchase agreement
Term REPO
up to 30 days instead of overnight
Individuals who buy stocks on margin borrow part of the funds to ay for the stock from their broker. The broker in turn may borrow the funds from a bank, agreeing to repay the bank immediately (on call) if the bank requests is.
Broker’s Calls
Funds in the accounts of commercial banks at the Federal Reserve Bank.
Federal Funds
The necessary amount in a Federal Reserve account depends on what?
The level of consumer deposits at the financial institution.
Lending rate among banks in the London market.
LIBOR
Debt obligations of the federal government with original matures of one year or more.
Treasury notes (up to 10 years) Treasury bonds ( 10 & 30 year maturities)
Tax-exempt bonds issued by state and local governments.
Municipal bonds
Unsecured bonds
debentures
Give the firm the option to repurchase the bond from the holder at a stipulated call price.
callable bonds
Give the bondholder the option to convert each bond into a stipulated number of shares of stock.
Convertible bonds
Long-term debt issued by private corporations typically paying semi-annual coupons and retiring the face value of the bond at maturity.
corporate bonds
Ownership shares in a publicly held corporation. Shareholders have voting rights and may receive dividends.
common stocks
Stockholders are the last in line of all those who have a claim on the assets and income of the corporation.
Residual claim
Nonvoting shares in a corporations, usually paying a fixed stream of dividends at are usually cumulative.
Preferred stock
The price the investor pays to purchase the security
Ask price
The price you would pay to sell to the dealer.
Bid price (dealer buys at bid)
The rate that investors pay to their brokers when they buy stocks on margin.
call money rate
Buy more securities than you have money for by utilizing leverage.
buying on margin
A proportional share of a pool of securities.
pass thru security
An ownership claim in a mortgage pool or a claim to an obligation secured by a mortgage pool.
Mortgage backed security
Why do corporations own majority of preferred stock?
They can exclude 70% of dividends received for tax purposes.
Certificates that represent ownership of a foreign company that are traded in the U.S.
American Depository Receipts (ADR)
An average computed by adding the prices of the stocks and dividing by a “divisor”
Price weighted average
Computed by calculating a weighted average of returns of each security in the index, with weights proportional to outstanding market value.
market value weighting
An index computed form a simple average of returns.
equally wighted index
Bonds that are linked to the consumer price index (CPI) where the principal of the bond is adjusted to the CPI to reduce inflation risk. Yields are in “Real” or inflation adjusted terms.
Treasury inflation protected securities (TIPS)
A security with a payoff that depends on the prices of other securities
Derivative asset or contingent claim
The right to buy an asset at a specified exercise price on or before a specialize expiration date.
put option
Obliges traders to purchase or sell an asset at an agreed-upon price at a specified future date.
futures contract
Buyers and sellers locate each other on their own.
Direct search market
A broker is the 3rd party as siting either the buyer or the seller to find the other side of the trade.
Brokered market
The 3rd party acting as an intermediate buyer of the seller. Markets in which traders specializing in particular assets buy and sell for their own accounts.
Dealer market
A market where all traders meet at one place to buy or sell an asset.
Auction market
Buy or sell orders that are to be executed immediately at current market prices.
market orders
To buy or sell at a specified price or better.
limit order
stock is to be sold if its price falls below a stipulated level
stop loss order
stock is to be bought when its price rises above a limit
stop buy order
Gives the broker authority to buy and sell at their discretion.
discretionary order
GIC order
good until canceled and can last up to 60 days maximum
A network of brokers & dealers where the eaters quote prices and the brokers execute trades for clients by contacting the dealers.
Dealer market
What does NASDAQ stand for?
National Association of Security Dealers Automated Quotations systems
Explain the 3 levels of Subscribers
Level 1: can see only inside quotes (highest bid & lowest ask)
Level 2: receives all bid and ask quotes, but they cannot enter their own quotes (brokerage firms)
Level 3: can enter the bid and ask prices at which they are willing to buy or sell stocks into the computer network and may updates these quotes as desired.
Traders buy a license to trade on the floor of the exchange.
Exchange markets
An employee of the firm that processes the transaction
Commission broker
Independent member of the exchange that works for several firms as needed.
Floor broker
An independent trader.
floor trader
Specializes in large block trades. more than 10,000 shares
blockhouse
What are the steps to order?
- Place a market order to buy with a broker
- Broker electronically submits order to the floor of the exchange
- Commission broker takes the order to negotiate or send order to specialist to post
- commission broker makes the trade with specialist or other broker
What makes a market efficient?
- Low cost way to transfer money
- Enough taxing volume so that trades are timely and they don’t affect the stock price
- Transparency: good access to info
- competition in market: supply and demand
Minimum % of initial investor equity?
initial margin requirement (IMR)
The minimum level of equity before additional funds must be added to the account.
Maintenance margin requirement
A notification from the broker that an investor must put in more money or securities to bring it back up to the required amount.
Margin call
The equation for investor equity.
(market value of the investor’s position)-(amount investor borrowed initially)
% Margin
equity in account/stock value
The sale of shares not owned by the investor but borrowed through a broker and alter purchased to replace the loan.
short sale
a purchase and a sale
round trip
Where you buy first and sell later.
a long position round trip (bullish)
Where you sell first and buy later.
a short position round trip (bearish)
Market value of goods and services produced domestically over a peridot of time.
Gross Domestic Product
The rate at which the general level of prices for goods and services is rising.
inflation
Rate of economic growth that has a severe impact on security prices.
interest rate
How consumers feel about job prospects and the economy overall.
consumer sentiment
Patterns of recession, recovery, and growth
business cycle
Industries that have above average sensitivity to the state of the economy
cyclical industries
Below average sensitivity to the state of the economy
Defensive industries
They tend to rise and fall in advance to the economic increases and decreases.
leading indicators
change at the same time as the economy.
coincidental indicators
Follow or lag whats going on in the economy.
lagging indicators
