Financial Instruments and Security Trading

Question 1

Money Market

Answer 1

A subsector of the fixed income market where short term and highly liquid debt securities are traded.

Question 2

Treasury bills are

Answer 2

Short term debt of the US government
Par usually 10,000
Income exempt from state and local

Question 3

Certificates of deposit are

Answer 3

A time deposit with a bank

Highly marketable if maturity 100,000

Question 4

Commercial paper

Answer 4

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

Question 5

Bankers Acceptance

Answer 5

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.

Question 6

Eurodollars

Answer 6

Dollar denominated deposits at foreign banks or foreign branches of american banks
Escape regulation by the fed
Most are large time deposits of maturities

Question 7

Repos and reserves

Answer 7

Short term, usually overnight, loans backed by government securities
Issued by Gov security dealers
Backed by Gov securities - low risk

Question 8

Reverse Repo

Answer 8

Buy from investor, sell back at higher price

Question 9

Federal funds rate

Answer 9

Rate of interest on very short term loans among financial institutions.

Question 10

Brokers Call

Answer 10

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.

Question 11

Bond Market Instruments

Answer 11

Treasury notes and bonds
Inflation protected Treasury bonds
Federal agency debt
International Bonds
Municipal Bonds
Corporate Bonds
Mortgages and Mortgage backed securities

Question 12

Treasury Notes maturity up to

Answer 12

10 years

Question 13

Treasury Bonds maturity from

Answer 13

10-30 years

Question 14

Eurobond

Answer 14

A Bond issued in a currency other than that of the country in which it is issued.

Question 15

Yankee Bonds / Samurai Bonds

Answer 15

Bonds issued in a foreign country in the local currencies

Question 16

Municipal Bonds

Answer 16

Issued by state and local government.

Exempt from federal, state, and local taxes

Question 17

Corporate Bonds

Answer 17

Means by which private firms borrow money directly from the public.
Can be callable or convertible

Question 18

Mortgage Backed Securities (MBS)

Answer 18

Either an ownership claim in a pool of mortgages or an obligation that is secured by such a pool.
Also called “pass throughs”

Question 19

Preferred Stock Dividends, Tax treatment

Answer 19

70% of dividends are excluded from taxable income.

Question 20

American Depositary Receipts (ADR)

Answer 20

Certificates traded in the U.S. markets that represent ownership in shares of a foreign company.

Question 21

Stock Market Index

Answer 21

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

Question 22

Price weighted average

Answer 22

Firms weight proportional to its stock price (highest price has biggest weight)
Affected by stock splits
Fits the Buy and Hold strategy

Question 23

Value weighted average

Answer 23

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

Question 24

Equally weighted average

Answer 24

All firms carry the same weight

Fits strategy the requires rebalancing from period to period.

Question 25

Dow Jones Industrial Average consists of

Answer 25

The 30 largest “blue-chip” corporations.
Price weighted average
Equivalent to a portfolio with equal number of shares in each stock

Question 26

Standard & Poor’s Index consists of

Answer 26

500 stocks chosen based on market size and liquidity of listing.
Market value weighted average

Question 27

Call Option

Answer 27

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

Question 28

Put Option

Answer 28

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.

Question 29

Futures Contract

Answer 29

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.

Question 30

Futures - long position

Answer 30

Takes delivery at maturity - commits to purchasing the order at a specified price on the inception date.

Profits from price increases

Question 31

Futures - Short position

Answer 31

Makes delivery at maturity- commits to selling the order at a specified price on the inception date.

Profits from price decreases.

Question 32

Direct search market

Answer 32

Buyers seek each other out directly

Question 33

Brokered Markets

Answer 33

Brokers search out buyers and sellers

Question 34

Dealer Market

Answer 34

Dealers have inventories of assets from which they buy and sell

Question 35

Auction Market

Answer 35

Traders converge, physically and electronically, at one place to trade, ex NYSE

Question 36

Electronic Communication Network (ECN)

Answer 36

Allows participants to post market and limit orders over computer networks.
Modest cost: ask/bid spread low
Main system of trading stocks today

Question 37

Maintenance Margin

Answer 37

Minimum equity that must be kept in the margin account