Finance Flashcards
Indirect investing
The buying and selling of the shares of investment companies which, in turn, hold portfolios of securities.
Indirect: Investors Holding
Direct investing
Investors buy and sell securities themselves, typically through brokerage accounts.
Directing(Taking action): Investors buy/sell
Examples of non-marketable securities
1) Savings deposits
2) Certificates of deposit (This)
3) Money market deposit accounts (This)
4) US savings bonds
I don’t live in (SD) San Diego)
Non-Marketable=Deposits and 2 saves
Save (deposit) (US savings bonds)
Certificates
and
Money Markets
Certificate:
Fixed maturity
Maybe penalty if withdrawal
More $ Then Savings
Money Market:
Limited Checks
By bank but insured by government
US Saving bonds:
By government
For small companies
Cannot be sold or exchanged
Examples of money market securities
1) Treasury Bills
2) Negotiable certificates of deposit
3) Commercial paper
4) Repurchase agreements
5) Bankers acceptances
Money Market is the rest Treasury Bill: Debt by gov Short maturity Discount to Face value
Negotiable certificate of (deposit):
- Exchange for deposit of funds)
- Mature
- Can be sold before maturity
Commercial Paper:
- Short Term
- Large Companies
Repurchase agreements
- Buy Securities
- Buyer+Lender repurchases Gov securities
- Repurchase is higher then selling.
- Short term
Bankers Acceptances
- Pay back by certain time
- You are able to sell to others
- Trade internationally
Examples of capital market securities
1) Bonds
2) Common Stock
3) Preferred Stock
Capital Market= Only one with stocks. And there’s 1 bond
Savings deposits
1) Account at commercial bank or similar institution
2) Very safe; insured by the government
3) Highly liquid
Certificates of deposit
1) Account at commercial bank or similar institution
2) Fixed maturity
3) May be penalty if you withdraw money before maturity
4) Very safe; insured by the government
5) Typically offers higher yields than savings accounts
Fixed maturity
Maybe penalty if withdrawal
More $ Then Savings
Money market deposit accounts
1) Account at commercial bank or similar institution
2) Similar to savings accounts but can make a limited number of payments by check.
3) Very safe; insured by the government
Limited Number of checks
Insured by government
US savings bonds
1) Debt issued by the US government
2) Cannot be sold or transferred to others
3) Designed for small investors
Cannot be sold/transferred
Small investors
Treasury Bills
1) Debt issued by US government
2) Issued at discount to face value
3) Very safe asset
4) Short maturity
Short maturity
Issued by gov and at discount to face value
Negotiable certificates of deposit
1) Issued by a bank in exchange for deposit of funds.
2)Fixed maturity
3) Can be sold in the open market before maturity.
Issued by bank in exchange for deposit of funds
Fixed Maturity
Can be sold to open market before maturity
TIPS
1) Treasury Inflation-Protected Security
2) Designed to protect investors against unexpected inflation
3) Principal is adjusted for inflation so you will earn more (in dollars) if inflation is higher
Government agency securities
1) Issued by agencies of the Federal Government or government-sponsored agencies
2) Often associated with mortgage programs
3) Often known by nicknames: Ginnie Mae, Fannie Mae and Freddie Mac
Often known as mortgage programs
Ginnie Mae: Most important agency
Fannie/Freddie: Offered stock to public
Repurchase agreements
1) An agreement between a borrower and lender to sell and then repurchase US government securities.
2) The repurchase price is slightly greater than the selling price effectively making this a short-term loan.
(Repurchase) agreement
- Borrower+Lender to sell then repurchase US Gov securities
- Repurchase is higher then selling.
- Short term
Bankers acceptances
1) A note where a bank promises to pay a specific amount at a specified date.
2) The holder can sell to others (they are negotiable)
3) Generally used in international trade as a way to guarantee payment
- The bank accepts they have to pay back
- They can sell to others
- Good for international
Commercial paper
A short- term promissory note, generally issued by large companies, often by financial companies.
- Short term
- Large Companies
Money market securities
1) Short-term (maturity of a year or less)
2) Highly liquid
3) Relatively low risk
4) Relatively low return
Why do investors hold money market securities?
Money market securities are used by investors as a safe and liquid place to store wealth. Generally not used for long-run investing.
- safe
- liquid
- Long-Run
What is the purpose of the capital market?
To connect the suppliers and demands of funds.
Capital Marketing. C stands for Connect
Connects Suppliers and demands of funds.
Fixed-Income Security
An investment that provides fixed payments known in advance, e.g., a bond.
*Fix payments known in advance such as a bond
Bond
A debt security or “IOU”
The issuer promises to make regular interest payments and/or a single lump-sum payment at maturity
Par value (face value)
Amount paid at maturity to holder of a bond
the value printed or depicted on a coin, banknote, postage stamp, ticket, etc., esp. when less than the actual or intrinsic value
Maturity (bond)
When final payment is made
Coupon (bond)
Periodic interest payment made to a bond holder
Discount (bond)
A bond that sells for less than its par value
Premium (bond)
A bond that sells for more than its par value
Callable (bond)
Gives the issuer of the bond the right to buy it back at a predetermined price.
Call to buy back at predetermined price
Zero-coupon bond
A bond without coupons. Will be sold at a discount.
Major Types of Domestic Bonds
1) Treasury Bonds
2) Corporate Bonds
3) Municipal Bonds
Municipal- Issued by state and local government
Corporate Bonds-
- Long term
- Sold by corporations
Corporate Bonds
Long-term debt securities of various types sold by corporations
- Long term
- Sold by corporations
Debt of the US Government
1) Treasury Bills - Maturity of a year or less
2) Treasury Notes - Maturity of more than a year and less than 10 years
3) Treasury Bonds - Maturity of 10 years or more
Municipal Bonds
Bonds issues by state and local governments
Junk Bonds
Bonds with higher probability of default that offer higher expected yields. Sometimes called high-yield bonds.
Junk Bonds
*Things you throw away. High yield.
Convertible bond
Bond with an option to convert into stock
Convert bonds to stocks
Asset-backed securities
A security whose value is derived from a pool of underlying income-generating assets such as auto loans, credit card receivables or mortgages.
Derived=Traced
*A security traced from income
Mortgage-backed security
A type of asset-backed security whose value is derived from an underlying pool of mortgages.
- Backed up income traced from mortages
Preferred stock
1) Is considered a hybrid security
2) Dividends are fixed and known in advance (like debt)
3) Has an infinite life (like equity)
4) Dividends do not have to be paid, but unpaid dividends may have to be made up in future years
5) Preferred stockholders are paid before common stockholders but after bondholders
- Dividends dont have to be paid but it may take many years to pay back
- Paid before common stockholders but bafter bondholders
Common stock
1) An “equity” security
2) Represents an ownership interest in the company
3) Shareholders have limited liability
4) Shareholders get return from dividends and/or capital gains (increases in the value of the stock)
Dividend
Cash payments made by corporations to stock holders
Divided up cash payments from corporations to stock holders
Stock dividend
A payment by the corporation in stock rather than cash. Generally does not increase the value of stock to the shareholders.
*Divide stock in cash. Rather pick stock
Stock split
The issuance by a corporation of shares in common stock in proportion to the existing shares outstanding. Generally does not increase the value of stock to the shareholders.
American Depositary Receipt (ADR)
Securities representing an ownership interest in the equities of large foreign companies.
*Ownership in large foreign companies
Derivatives securities
Securities that derive their value in whole or in part by having a claim on some underlying security
*
Examples of derivative securities
1) Options
2) Futures
3) Warrants
Option
Right to buy or sell a stated number of shares of a security within a specified period at a specified price.
*To buy/sell shares within time limit at specified price
Futures Contract
Agreement providing for the future exchange of a particular asset at a currently determined market price.
*Future exchange
Warrant
Gives the holder the option to buy stock from the company at a specified price
*Able to buy stock from company at specified price
Hybrid security
A security having aspects of both debt and equity securities
Corporation bonds and commercial paper
Commercial paper: Short term. Large companies
Corporation: Long term. Large corporations
