Exam 1 - Chapter 2 [Slides]

Question 1

Asset Classes
Debt
- Short term are placed in what type of markets

Answer 1

Money Markets

Question 2

Asset classes
- Debt
What is long-term debt stored in (What market)

Answer 2

Capital

Question 3

What are the two Asset Classes

Answer 3

Debt
- Short- term & Long-term
Equity/Stock

Question 4

Who has Treasury Bills?

Answer 4

Federal Government

Question 5

Who has Certificates of Deposit

Answer 5

Commercial Banks

Question 6

Who has Commercial Paper?

Answer 6

Corporations -> Only high level corporations

Question 7

Who has Bankers’ Acceptances

Answer 7

Post dated check -> guarantee by commercial banks

Question 8

Who has Eurodollars

Answer 8

Dollar denominated time deposit in foreign countries
Foreign countries keyword
- It’s a time deposit

Question 9

Who has Repurchase Agreement (Repos)

Answer 9

Collaterized short-term debt

Question 10

Who has Broker’s Calls

Answer 10

Margin loan

Question 11

Who has Federal funds

Answer 11

Loan for reserve requirement

Question 12

Is Repurchase Agreement short-term or long-term?

Answer 12

Short-term

Question 13

Treasury Bills

- Issued by?

Answer 13

Federal Government

Question 14

Treasury Bills

- Denominations?

Answer 14

$100, commonly $10,000

Question 15

Treasury Bills

- Maturity

Answer 15

4, 13, 26, or 52 weeks

Question 16

Treasury Bills

- Liquidity (high or low)

Answer 16

Highly liquid

Question 17

Treasury Bills

- Is there a Default risk?

Answer 17

None

Question 18

Treasury Bills

- Quoted in?

Answer 18

Discount

Question 19

Treasury Bills

- Is there taxation?

Answer 19

No, Federal taxes owed, exempt from state and local taxes

Question 20

Commercial Paper

- Issued by?

Answer 20

Large creditworthy corporations and financial institutions

Question 21

Commercial Paper

- Maturity?

Answer 21

Maximum 270 days, usually 1 to 2 months

Question 22

Commercial Paper

- Denomination

Answer 22

Minimum $100,000

Question 23

Commercial Paper

- Liquidity?

Answer 23

3 months or less are liquid if marketable

Question 24

Commercial Paper

- Default risk

Answer 24

Unsecured, Rated, Mostly high quality

Question 25

Commercial Paper | - Quoted in

Answer 25

Discount

Question 26

Commercial Paper | - Taxation

Answer 26

Interest income is fully taxable

Question 27

Bankers Acceptance

Answer 27

- Originates when a purchaser of goods authorizes its bank to pay the seller for the goods at a date in the future ( a draft is used like a post dated check) - When the purchaser’s bank agrees to “accept” the draft it becomes a contingent liability of th bank and becomes a marketable security

Question 28

What is Eurodollars

Answer 28

- Dollar denominated (time) deposits held outside the U.S | - Usually pay a higher interest rate than U.S. deposit

Question 29

Are yields on money markets s instruments always comparable?

Answer 29

No, because they use different price Quotations methods: Discount or BEY?

Question 30

What are the 2 factors to consider for yield calculation?

Answer 30

1. Par Value vs. Investment Value | 2. Quotes may use different day count convention (360 vs 365 days in a year)

Question 31

What do they treat 1 year as in days

Answer 31

360 days

Question 32

1% point is ____ bases point

Answer 32

100

Question 33

What is .05 is ____ bases point

Answer 33

50

Question 34

What is the actual discount formula?

Answer 34

Discount rate x How many days / 360 x Suppose par value

Question 35

What cant you compare directly to bond Yield? | Why?

Answer 35

T-bill | - because the discount rate is not a yield

Question 36

What are the two ways for Quoting is ?

Answer 36

1 . Bond Equivalent Yield | 2. Discount Rate

Question 37

What is the difference between Treasury Bonds and Notes?

Answer 37

Maturity

Question 38

What are the 5 Long-term Debt Instruments

Answer 38

1. Treasury Bonds/Notes 2. Government-Sponsored Agency issues 3. Municipal bonds 4. Corporate Bonds 5. Eurobonds

Question 39

What is most common Semi annual Annually Quarterly

Answer 39

Semiannual

Question 40

What is a premium bond

Answer 40

Par value is more than bond price

Question 41

Federal Agency/ Government Sponsored Enterprise Issues | What majority debts they issue?

Answer 41

Home mortgage related debts

Question 42

What are MBS Also issued by

Answer 42

Subsidiaries of Investment Banks

Question 43

What is CMO also called?

Answer 43

Derivatives security

Question 44

What is Munis

Answer 44

Municipal Bonds

Question 45

Does Municipal Bond have Default Risk

Answer 45

Yes

Question 46

Are Municipal Bonds have Taxation

Answer 46

They are tax exempt from Federal Income Tax

Question 47

What is Marginal Tax rate also called?

Answer 47

Tax Bracket

Question 48

Debt that isn’t security is called?

Answer 48

Debenture

Question 49

Why is it called Security Debenture

Answer 49

Since its backed by something

Question 50

What are the 3 bond rating service companies

Answer 50

Standard and poor Moodys Fitch

Question 51

Eurobonds:

Answer 51

Foreign currency-denominated bonds issued by the foreign companies

Question 52

What are the most popular Eurobonds?

Answer 52

Euro dollar bonds & Euro yen bonds

Question 53

Foreign bonds:

Answer 53

Domestic currency-denominated bonds issued by the foreign companies

Question 54

What are example of foreign bonds

Answer 54

Yankee, Samurai, Arirang, Bulldog bonds

Question 55

What is equity also called?

Answer 55

Equity

Question 56

4 things in common stock

Answer 56

- Residual claim - limited liability - preemptive rights - voting rights

Question 57

Preemptive rights

Answer 57

Stock owner as a owner whenever is there a new issues of common stock the existing shareholder has the right to buy first

Question 58

Votings right

Answer 58

Annual meeting an elect directors

Question 59

What’s different between common stock and preferred stock

Answer 59

Common stock - Dividend vary over time | Preferred stock - dividend is fixed

Question 60

Who has priority preferred or common stock?

Answer 60

Preferred

Question 61

What’s the drawback of preferred stock?

Answer 61

Double taxation

Question 62

What doesnt preferred stock have compared to common stock?

Answer 62

Voting rights

Question 63

Preferred stock | - Corporate tax exclusion on ___% dividend earned

Answer 63

70%

Question 64

What are the uses of Stock and Bond Indexes

Answer 64

- Track market average returns - Comparing performance of Portfolio managers - Reflect overall market perception on economic status in the foreseeable future

Question 65

Factors in constructing or using an index

Answer 65

Representative Broad or narrow How is it constructed

Question 66

To construct an equity index, we need to determine 2 things

Answer 66

What stocks to include | What weighting schemes to use

Question 67

Equally weighted index

Answer 67

Portfolio index where the same amount of $ in each stock are invested

Question 68

Market Value Weighted Index

Answer 68

Portfolio Index where $ amounts invested in each stock are proportional to the market value of outstanding shares (market cap size) of each stock

Question 69

Price Weighted Index

Answer 69

It is a portfolio index in which one share of each stock is included