Financial Instruments and Security Trading Flashcards
Money Market
A subsector of the fixed income market where short term and highly liquid debt securities are traded.
Treasury bills are
Short term debt of the US government
Par usually 10,000
Income exempt from state and local
Certificates of deposit are
A time deposit with a bank
Highly marketable if maturity 100,000
Commercial paper
Short Term unsecured debt offered by large, well known companies
Maturity usually 1-2 months, but up to 270 days
Issued in multiples of 100,000
often backed by LOC
Bankers Acceptance
An order to a bank by a customer to pay a sum of money at a future date, typically within 6 months
Similar to a postdated check
Widely used in foreign trade
Bank responsible for he payment to the holder of the acceptance.
Eurodollars
Dollar denominated deposits at foreign banks or foreign branches of american banks
Escape regulation by the fed
Most are large time deposits of maturities
Repos and reserves
Short term, usually overnight, loans backed by government securities
Issued by Gov security dealers
Backed by Gov securities - low risk
Reverse Repo
Buy from investor, sell back at higher price
Federal funds rate
Rate of interest on very short term loans among financial institutions.
Brokers Call
Investors who buy stocks on margin borrow funds from their broker and the broker in turn can borrow the funds from a bank, agreeing to repay immediately (ON CALL) if the bank requests it.
Bond Market Instruments
Treasury notes and bonds Inflation protected Treasury bonds Federal agency debt International Bonds Municipal Bonds Corporate Bonds Mortgages and Mortgage backed securities
Treasury Notes maturity up to
10 years
Treasury Bonds maturity from
10-30 years
Eurobond
A Bond issued in a currency other than that of the country in which it is issued.
Yankee Bonds / Samurai Bonds
Bonds issued in a foreign country in the local currencies
Municipal Bonds
Issued by state and local government.
Exempt from federal, state, and local taxes
Corporate Bonds
Means by which private firms borrow money directly from the public.
Can be callable or convertible
Mortgage Backed Securities (MBS)
Either an ownership claim in a pool of mortgages or an obligation that is secured by such a pool.
Also called “pass throughs”
Preferred Stock Dividends, Tax treatment
70% of dividends are excluded from taxable income.
American Depositary Receipts (ADR)
Certificates traded in the U.S. markets that represent ownership in shares of a foreign company.
Stock Market Index
An imaginary portfolio of equity securities representing a particular market or portion of it.
Can be used as a bench-marking tool
Shown broad sense of market movement
Price weighted average
Firms weight proportional to its stock price (highest price has biggest weight)
Affected by stock splits
Fits the Buy and Hold strategy
Value weighted average
Firms weight proportional to its market capitalization (number of shares*Price - largest # has most weight).
Not affected by stock splits, cap amt stays the same regardless.
Fits the Buy and Hold strategy
Equally weighted average
All firms carry the same weight
Fits strategy the requires rebalancing from period to period.
Dow Jones Industrial Average consists of
The 30 largest “blue-chip” corporations.
Price weighted average
Equivalent to a portfolio with equal number of shares in each stock
Standard & Poor’s Index consists of
500 stocks chosen based on market size and liquidity of listing.
Market value weighted average
Call Option
Gives the holder the right to purchase an asset for a specified price, called the exercise or strike price, on or before the set expiration date.
Value decreases as strike price increases
Provide great profits when stock prices increase - bullish market
Put Option
Gives the holder the right to sell an asset for a specified exercise price on or before a specified expiration date.
Value increases as strike price increases
Provides great profits when the stock price falls - Bear market.
Futures Contract
An agreement made today regarding the delivery of an asset (or in some cases, its cash value) at a specified delivery or maturity date for an agreed upon price, called the futures price, to be paid at contract maturity.
No premium price - Unlike Options.
Futures - long position
Takes delivery at maturity - commits to purchasing the order at a specified price on the inception date.
Profits from price increases
Futures - Short position
Makes delivery at maturity- commits to selling the order at a specified price on the inception date.
Profits from price decreases.
Direct search market
Buyers seek each other out directly
Brokered Markets
Brokers search out buyers and sellers
Dealer Market
Dealers have inventories of assets from which they buy and sell
Auction Market
Traders converge, physically and electronically, at one place to trade, ex NYSE
Electronic Communication Network (ECN)
Allows participants to post market and limit orders over computer networks.
Modest cost: ask/bid spread low
Main system of trading stocks today
Maintenance Margin
Minimum equity that must be kept in the margin account
