FIN 431: CH.1-3

Question 1

Commitment of current resources in the expectation of deriving greater resources in the future.

Answer 1

investment

Question 2

are land, buildings, and equipment that are used to produce goods and services.

Answer 2

real assets

Question 3

stocks and bonds are claims to the income generated by real assets or claims on income from the government.

Answer 3

financial assets

Question 4

A security such as a bond that pays a specified cash flow over a specific period.

Answer 4

fixed-income security

Question 5

Ownership in a firm. Also, the net worth of a margin account.

Answer 5

equity

Question 6

A security whose payoff depends on the value of other financial variables such as stock prices,

Answer 6

derivative security

Question 7

Conflicts of interest among stockholders, bondholders, and managers.

Answer 7

agency problem

Question 8

Choosing among broad asset classes such as stocks versus bonds.

Answer 8

asset allocation

Question 9

Determining correct value of a security in the marketplace.

Answer 9

security analysis

Question 10

Investors must take on greater risk if they want higher expected returns.

Answer 10

risk–return trade-off

Question 11

Buying a well-diversified portfolio to represent a broad-based market index without attempting to search out mispriced securities.

Answer 11

passive management

Question 12

Attempts to achieve portfolio returns more than commensurate with risk, either by forecasting broad market trends or by identifying particular mispriced sectors of a market or securities in a market.

Answer 12

active management

Question 13

An institution such as a bank, mutual fund, investment company, or insurance company that serves to connect the household and business sectors so households can invest and businesses can finance production.

Answer 13

financial intermediaries

Question 14

Firm managing funds for investors. An investment company may manage several mutual funds.

Answer 14

investment company

Question 15

Firms specializing in the sale of new securities to the public, typically by underwriting the issue.

Answer 15

investment bankers

Question 16

New issues of securities are offered to the public here.

Answer 16

primary market

Question 17

Already existing securities are bought and sold on the exchanges or in the OTC market.

Answer 17

secondary market

Question 18

Money invested to finance a new, not yet publicly-traded firm.

Answer 18

venture capital

Question 19

Investment in a company that is not traded on a stock exchange.

Answer 19

private equity

Question 20

Pooling loans for various purposes into standardized securities backed by those loans, which can then be traded like any other security.

Answer 20

securitization

Question 21

Risk of breakdown in the financial system, particularly due to spillover effects from one mark into others.

Answer 21

systemic risk

Question 22

Includes short-term, highly liquid, and relatively low-risk debt instruments.

Answer 22

money market

Question 23

Includes longer-term, relatively riskier securities.

Answer 23

capital markets

Question 24

The price at which a dealer will sell a security.

Answer 24

ask price

Question 25

The price at which a dealer is willing to purchase a security.

Answer 25

bid price

Question 26

The difference between a dealer's bid and ask price.

Answer 26

bid–ask spread

Question 27

A bank time deposit.

Answer 27

certificate of deposit

Question 28

Short-term unsecured debt issued by large corporations.

Answer 28

commercial paper

Question 29

A money market asset consisting of an order to a bank by a customer to pay a sum of money at a future date.

Answer 29

banker's acceptance

Question 30

Dollar-denominated deposits at foreign banks or foreign branches of American banks.

Answer 30

Eurodollars

Question 31

Short-term, often overnight, sales of government securities with an agreement to repurchase the securities at a slightly higher price. A reverse repo is a purchase with an agreement to resell at a specified price on a future date.

Answer 31

repurchase agreements

Question 32

Rate that most creditworthy banks charge one another for large loans of Eurodollars in the London market.

Answer 32

London Interbank Offered Rate (LIBOR)

Question 33

Funds in a bank's reserve account.

Answer 33

federal funds

Question 34

Debt obligations of the federal government that make semiannual coupon payments and are issued at or near par value.

Answer 34

Treasury bond or note

Question 35

A measure of the average rate of return that will be earned on a bond if held to maturity.

Answer 35

yield to maturity

Question 36

Tax-exempt bonds issued by state and local governments, generally to finance capital improvement projects. General obligation bonds are backed by the general

Answer 36

municipal bonds

Question 37

The pretax yield on a taxable bond providing an after-tax yield equal to the rate on a tax-exempt municipal bond

Answer 37

equivalent taxable yield

Question 38

Refers to the fact that shareholders are at the bottom of the list of claimants to assets of a corporation in the event of failure or bankruptcy

Answer 38

residual claim

Question 39

The fact that shareholders have no personal liability to the creditors of the corporation in the event of bankruptcy.

Answer 39

limited liability

Question 40

The amount by which the sale price of a security exceeds the purchase price.

Answer 40

capital gains

Question 41

The ratio of a stock's price to its earnings per share. Also referred to as the P/E multiple.

Answer 41

price–earnings (P/E) ratio

Question 42

Nonvoting shares in a corporation, paying a fixed or variable stream of dividends.

Answer 42

preferred stock

Question 43

Weighted average with weights proportional to security prices rather than total capitalization.

Answer 43

price-weighted average

Question 44

An index of a group of securities computed by calculating a weighted average of the returns of each security in the index, with weights proportional to outstanding market value

Answer 44

market-value-weighted index

Question 45

A mutual fund holding shares in proportion to their representation in a market index such as the S&P 500.

Answer 45

index fund

Question 46

Securities providing payoffs that depend on or are contingent on the values of other assets such as commodity prices, bond and stock prices, or market-index values. Examples are futures and options.

Answer 46

derivative asset/contingent claim

Question 47

The right to buy an asset at a specified exercise price on or before a specified expiration date.

Answer 47

call option

Question 48

Price set for calling (buying) an asset or putting (selling) an asset.

Answer 48

exercise or strike price

Question 49

The right to sell an asset at a specified exercise price on or before a specified expiration date.

Answer 49

put option

Question 50

Obliges traders to purchase or sell an asset at an agreed-upon price on a specified future date. The long position is held by the trader who commits to purchase. The short position is held by the trader who commits to sell. Futures differ from forward contracts in their standardization, exchange trading, margin requirements, and daily settling (marking to market).

Answer 50

futures contract

Question 51

Primary offering in which shares are sold directly to a small group of institutional or wealthy investors.

Answer 51

private placement

Question 52

Stock issued to the public for the first time by a formerly privately owned company.

Answer 52

initial public offering (IPOs)

Question 53

Investment bankers who help companies issue their securities to the public

Answer 53

underwriters

Question 54

A final and approved registration statement including the price at which the security issue is offered.

Answer 54

prospectus

Question 55

A market where traders specializing in particular commodities buy and sell assets for their own accounts. The OTC market is an example.

Answer 55

dealer market

Question 56

A market where all traders in a good meet at one place to buy or sell an asset. The NYSE is an example.

Answer 56

auction market

Question 57

An order specifying a price at which an investor is willing to buy or sell a security.

Answer 57

limit order

Question 58

Order to trade contingent on security price designed to limit losses if price moves against the trader.

Answer 58

stop orders

Question 59

An informal network of brokers and dealers who negotiate sales of securities (not a formal exchange).

Answer 59

over-the-counter market (OTC)

Question 60

The automated quotation system for the OTC market, showing current bid ask prices for thousands of stocks.

Answer 60

NASDAQ

Question 61

A computer-operated trading network offering an alternative to formal stock exchanges or dealer markets for trading securities

Answer 61

electronic communication network (ECN) | .

Question 62

A trader who makes a market in the shares of one or more firms and who maintains a “fair and orderly market” by dealing personally in the stock

Answer 62

specialist

Question 63

Secondary markets where already-issued securities are bought and sold by members.

Answer 63

stock exchanges

Question 64

The time it takes to accept, process, and deliver a trading order.

Answer 64

latency

Question 65

The use of computer programs to make trading decisions

Answer 65

algorithmic trading

Question 66

A subset of algorithmic trading that relies on computer programs to make rapid trading decisions.

Answer 66

high-frequency trading

Question 67

A transaction of more than 10,000 shares of stock.

Answer 67

blocks, block sale

Question 68

Electronic trading networks where participants can anonymously buy or sell large blocks of securities

Answer 68

dark pools

Question 69

Describes securities purchased with money borrowed from a broker. Current maximum margin is 50%

Answer 69

margin

Question 70

The sale of shares not owned by the investor but borrowed through a broker and later repurchased to replace the loan. Profit is earned if the initial sale is at a higher price than the repurchase price.

Answer 70

short sale

Question 71

Nonpublic knowledge about a corporation possessed by corporate officers, major owners, or other individuals with privileged access to information about a firm.

Answer 71

inside information