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Financial economics > Financial Instruments > Flashcards

Financial Instruments Flashcards

0
Q

Certificates of deposit (CD)

A

Time deposit with a bank

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1
Q

Treasury bills

A

Sold at discount, highly liquid, short term (up to 52w), face value paid at maturity
Can be in small denomination, $100000 common
Income exempt from all state and local taxes

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2
Q

Commercial papers

A

Maturity up to 270d, can be backed by a bank line of credit,

Smaller regulation requirements that for the stocks, don’t require listings

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3
Q

Bankers’ acceptances

A

Order to a bank by a bank’s client to pay a sum of money at a future date

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4
Q

Eurodollars

A

Dollar denominated deposits at foreign banks or for. branches of american banks
Riskier than domestic CDs, offer higher yield

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5
Q

Repurchase agreements (repos, RP)

A

A dealer buys (sells) government security on the overnight basis with the agreement to sell (buy) back those securities the next day at a slightly higher price

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6
Q

Repo

A

A short term implicit loan (<90d)

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7
Q

Federal funds

A

Banks’ funds in a reserve account with FED

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8
Q

Broker’s calls

A

In case of trading on the margin, a buyer borrows part of the funds to pay for the stock

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9
Q

LIBOR (London Interbank Offered Rate)

A

The rate at which large banks in London are willing to lend money to each other
Similarly, EURIBOR, PRIBOR, federal funds rate

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10
Q

Bond market

A

Fixed income capital market

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11
Q

Treasury notes and bonds

A

Maturities up to 10 years (notes), 10-30 (bonds)
Stream of coupon payments
T-bonds are callable - the treasury has the right to buy back the bond at par value

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12
Q

Federal agency debt

A

Securities issued by government agencies

Potentially safe, ase the government will step in

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13
Q

Eurobond

A

A bond denominated in currency other than of the country it is traded in
Bonds issued by foreign companies but in the currency of investors

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14
Q

Municipal bonds

A

Issued by state and local governments, interes income is tax-exempt
General obligation bond: backed by “full faith and credit”
Revenue bond: issued to finance a particular project, backed by revenues from it
Industrial development bond - revenue bond issued to finance commercial enterprises

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15
Q

Secured bonds

A

backed by collateral
Debentures - unsecured bonds
Subordinated debentures - give the lower-priority claim to the firm’s asset in the event of bankruptcx
Callable bonds - firm has the right to repurchase the bond
Convertible bonds

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16
Q

Debentures

A

Unsecured bonds

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17
Q

Subordinated debentures

A

give the lower-priority claim to the firm’s asset in the event of bankruptcy

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18
Q

Convertible bond

A

Give the bondholder the option to convert each bond into a stipulated number of shares

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19
Q

Mortgage-backed securities

A

Ownership claim secured by pool of mortgages

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20
Q

Conforming mortgages

A

Loans must satisfy certain anderlying guidelines

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21
Q

Subprime mortgages

A

Riskier loans made to financially weaker borrowers

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22
Q

Common stocks

A

Residual claims, give the voting rights, limited liability

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23
Q

Preffered stock

A

Features similar to equity and debt: property rights but no voting rights, first priority to dividends
Redeemable - callable by issuing firm
Convertible into common s. at a spec. conversion ratio
Adjustable-rate - ties the dividend to current market interest rates

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24
Q

Closely held corporations

A

Corporations the stock of which are not publicly traded

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25
Q

American depository receipts

A

Certificates traded in Us markets that represent ownership in shares of a foreign company

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26
Q

DJIA

A

Measures the return (excluding dividends) on a portfolio that invests in each each stock

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27
Q

Equally weighted indeces

A

The value invested in each company should be the same

28
Q

Derivative

A

Financial instrument the payoff of which depends on other, more basic, underlying variables

29
Q

Call option

A

Gives the holder the right to by at the exercise or strike price

30
Q

Put options

A

Give the holder the right to sell at the exercise or strike price

31
Q

European vs. American option

A

Eu: can be exercised at the expiration date
Am: can be exercised at any date before and including expiration date

32
Q

Forward contracts

A

An obligation to buy (long position) or sell (short position) an asset at certain time for a certain price: traded on over the counter markets

33
Q

Future contracts

A

Like forward contracts, only traded on exchanges and more standardized

34
Q

Initial public offering

A

Issuance of stocks by a formerly privately owned company

35
Q

Seasonal equity offerings

A

Issued by companies that already have floated equity

36
Q

Private placement

A

Securities sold to a couple of institutional investors, hold to maturity

37
Q

Wah are underwriters for?

A

Road shows - publicity
Generating interest
Collecting data about the prices (process of polling investors = book-building, book=indication of interest)

38
Q

What do the underwriters receive?

A

Spread as a compensation

Shares of the firm

39
Q

Types of markets

A

Direct search
Brokered (underwriters are brokers)
Dealer (profit = spread between bid and ask price)
Electronic communication networks

40
Q

Specialist markets

A

Specialist manages the trading of the security assigned to him
Executes the orders of other brokers as well as his own

41
Q

Block houses

A

Aid in the placement of block transactions (exceeding 10 000 shares)

42
Q

Market orders

A

Orders to be executed immediately at current market price

43
Q

Price-contingent order: a limit buy (sell) order

A

Buy (sell) the share if a price is at or below (above) the stipulated price

44
Q

Limit order book

A

Collection of limit orders

45
Q

Inside quotes

A

The highest buy and the lowest sell orders in the limit order book

46
Q

Stop loss (buy) order

A

The stock is to be sold if the price falls below (rises above) the stipulated level

47
Q

Short-selling

A

The investor borrows a share from a broker and sells it

48
Q

Svoering the short position

A

The purchase of securities which were previously sold

49
Q

Naked short selling

A

A trader sells shares that have not yet been borrowed

50
Q

Discount brokers

A

Execute orders
Hold securities for safe-keeping
Extend margin loans
Facilitate short sales

51
Q

Bull service brokers

A

Apart from what discount brokers do, they
Provide information
Give advice related to investment alternatives

52
Q

Discretionary account

A

The broker can buy and sell prespecified security whenever deemed fit

53
Q

Buying on margin

A

Process of buying securities partially finances by broker’s call loans

54
Q

Margin

A

The part of the security holdings finances by investor’s own money

55
Q

Maintenance margin

A

The minimum amount of investor’s own cash; if below, the broker will issue a margin call

56
Q

Margin call

A

The reauest to add new cash or securities to the margin account

57
Q

Managed companies

A

Portfolio securities are constantly bought and sold, i.e mutual funds

58
Q

Net asset value

A

Market value of assets minus liabilities/shares outstanding

59
Q

Closed-end

A

Shares issued by these companies are traded on stock exchanges, OTc; investors buy and sell to each other at market price, which may differ from net asset value

60
Q

Open-end

A

Firms redeem or issue at net asset value, purchase and redemption may involve sale charges; investors buy from or sell directly to a company

61
Q

Commingled funds

A

Partnership of investors that pool funds (money market/bond/common stock fund)

62
Q

Real estate investment trusts (REITs)

A

Invest in real estate or loans secured by real estate

63
Q

Hedge funds

A

Structures as private partnerships
Allow private investors to pool assets to be invested by a fund manager
Strategies: heavy use of derivatives, short sales, leverages (usually not open to mutual funds)

64
Q

Income funds

A

Tend to hold shares of firms with consistently higher dividend yields

65
Q

Growth funds

A

May forgo current income and focus on prospects for capital gains
Riskier than income funds

66
Q

Balanced funds

A

Hold both equities and fixed-income securities

Life-cycle funds - asset mix can range from aggressive (young inv) to constervative (older inv)

67
Q

Asset allocation and flexible funds

A

Also hold equities and bonds but the proportion depends on forecast and relative performance - try to exploit timing
Riskier

68
Q

Index funds

A

Try to match the performance of a broad market index

Financial economics (2 decks)

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