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Intro to Finance > Intro to Financial Instruments > Flashcards

Intro to Financial Instruments Flashcards

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1
Q

Money Market

A

-short tenor (up to 1 year)
-considered very low risk

(lowest risk asset you can invest in– all backed by trusted parties)

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2
Q

What is tenor?

A

how long until the instruments expire

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3
Q

What 5 aspects are involved in the money market?

A
  1. Treasury bills
  2. Certificates of deposit (CDs)
  3. Commercial paper
  4. Bankers acceptance
  5. Eurodollars
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4
Q

T-Bills

A

-backed by the full faith and credit of the United States government
-Tenor is 4, 13, 26, or 52 weeks
-interest is exempt from state and local taxes

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5
Q

Certificates of Deposit (CDs)

A

-time deposit with a bank
-insured by the FDIC up to $250,000 (United States government)
-can be purchased at any retail branch (contractually guaranteed)

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6
Q

Commercial Paper

A

-short term, unsecured debt
-maximum tenor of 270 days

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7
Q

what is the only loss in commercial paper?

A

the only loss is if the investment company is to file bankruptcy within the interim (fraud is one way)

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8
Q

How is commercial paper issued?

A

it is issued by either banks or large well-known companies

typically rated investment grade by a rating agency

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9
Q

Banker’s Acceptance

A

-typically related to international trade, a customer wants to make a purchase in the future
-a banker’s customer enters a contractual agreement to pay a sum in the near future (less than 6 months)
-the bank will then endorse the order, thus taking responsibility for the payment
-if the customer is unable to make the payment at maturity, the bank is contractually obligated to make the counterparty whole

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10
Q

Eurodollars

A

-US dollar denominated deposits at foreign banks or foreign branches of American banks
-the purpose of these accounts is to operate outside of the regulation of the Federal Reserve

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11
Q

What is fixed income?

A

Fixed income markets, also known as Credit Markets or the Bond Market is comprised of publicly traded debt

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12
Q

Coupon

A

semi annual payment made to the investor

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13
Q

Maturity Date

A

when the outstanding balance is due to the investor

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14
Q

Convenants

A

financial metrics which the Issuer must remain in compliance with

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15
Q

Collateral

A

assets that are transferred to the bond holders in the event of a liquidation

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16
Q

Credit risk

A

the risk that the Issuer of the bond defaults on its obligations

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17
Q

If the issuer defaults, …

A

the investor can potentially take a loss

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18
Q

Credit analysis is

A

making an estimate of the probability of default

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19
Q

What is the Issuer of Treasury Notes and Bonds?

A

the United States Government
-backed by the full faith and credit of the US government, and as such is considered risk free

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20
Q

Treasury Notes

A

maturity of between 1 and 10 years

21
Q

Treasury Bonds

A

maturity of 10 years or greater

22
Q

Two types of agency bonds:

A

Federal Government Agency Bonds
Government Sponsored Enterprise Bonds

23
Q

Federal Government Agency Bonds are issued

A

by a Federal Government Agency including:
1. Federal Housing Administration
2. Small Business Administration
3. Government National Mortgage Association (“GNMA”)

24
Q

The Government National Mortgage Association or GNMA is…

A

typically issued in connection with mortgage-backed securities (“MBS”)

25
Q

Government Sponsored Enterprise Bonds are issued by

A

entities which provide a public service but are not part of the federal government

26
Q

4 examples of Government Sponsored Enterprise Bonds include

A
  1. Federal National Mortgage Association (FNMA)
  2. Federal Home Loan Mortgage Corporation (FHLMC)
  3. Federal Farm Credit Banks Funding Corporation
  4. Federal Home Loan Bank
27
Q

Which two government sponsored enterprise bonds are associated with Mortgage-backed securities?

A

Federal National Mortgage Association (FNMA)
Federal Home Loan Mortgage Corporation (FHLMC)

28
Q

Municipal bonds are issued by

A

cities, states, counties, or other government entities

29
Q

General Obligation Bond:

A

backed by the full faith and credit of the issuing entity
ex: NJ issues a general obligation bond. The investor will receive timely payment unless the state of NJ were to declare for Bankruptcy

30
Q

Revenue Bond

A

issued in connection with a project which will generate revenue. The bondholders will receive timely payments if the project generates said revenue

31
Q

Corporate bonds are issued by

A

corporations.
Investors will receive timely payments as long as the corporation does not default.

32
Q

In the event of a default in corporate bonds,

A

In the event of a default, the investor’s loss will depend on where their debt is in the capital structure
-senior debt will take a lessor loss than subordinated/ unsecured debt
-the more senior a piece of debt is, the lower the yield

probability of default and loss upon default who gets what first*

33
Q

Common Stock or Equity

A

investing in a minority ownership position int he issuing company

34
Q

Price Appreciation

A

increases in the stock price between the time the investor purchases the shares, and when they sell said shares

35
Q

Dividends

A

quarterly cash payments which the Company makes to its shareholders. Distributions are completely optional.

36
Q

Public Corporation Structure

A

-CEO financial responsibility is to return money back to the shareholders (enrich shareholders not employees)
-CEO in company performing well, large portion of their compensation will be in stock
-Board of Directors report to the shareholders - represent the shareholders and are voted on by the shareholders

37
Q

Equity Categories (2)

A

Size
Valuation

38
Q

Market Capitalization

A

the aggregate value of the Company’s common stock

39
Q

How do you calculate market capitalization?

A

share price * shares outstanding

40
Q

Penny Stocks

A

very small market capitalizations. Share prices are less than $5

41
Q

Micro Cap Stocks

A

Market cap between $50 MM and $300 MM

42
Q

Small Cap Stocks

A

Market cap between $300 MM and $2Bn

43
Q

Mid Cap Stocks

A

Market cap between $2Bn and $10Bn

44
Q

Large Cap Stocks

A

market cap of greater than $10Bn
*typically larger companies are less volatile

45
Q

Growth Stocks (Valuation)

A

stocks of companies that the market expects to realize meaningful growth in its cash flow generation going forward.

As a result, the Company’s stock is high relative to its current cash flow generation

*growing tech companies

46
Q

This would result in a _______. How is this calculated?

A

high price/ earnings (P/E) ratio

(the price of the stock/ (net incomes/share outstanding)

47
Q

Value Stocks

A

stocks which appear to be priced low relative to its cash flow generation.
The market is pricing in lower expected future growth, relative to growth stocks

48
Q

Income Stocks

A

stocks which have consistently paid out a large dividend. These are typically well established companies

*walmart

49
Q

Preferred Stock

A

-no voting rights
-not a controlling position
-scheduled dividends which must be paid out before any dividends on common stock can be paid out
-no maturity date: is outstanding as long as the company is operating

Intro to Finance (11 decks)

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