Module 1 Flashcards by Ashley Perkins

Main areas of investment for an individual (6).

Human Capital -
Real Estate - Home
Insurance

Derivatives - Futures/Options
Equity - Stocks
Fixed Income - Bonds

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How does a passive investor make money?

General productivity growth in the economy

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current commitment of money or other resources in the expectation of reaping future benefits. You sacrifice something of value now, expecting to benefit from that sacrifice later

Investment

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assets used to produce goods and services

real assets

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claims on real asset or the income generated by them

financial assets

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We will focus almost exclusively on ______. But keep in mind that the successes or failures of these assets ultimately depend on the performance of the underlying _______

financial assets, real assets.

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Pay a specified cash flow over a specific period.

fixed income (debt) securities

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short term, highly marketable, and generally of very low risk, for example, U.S. Treasury bills or bank certificates of deposit (CDs).

money market securities

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long-term securities such as Treasury bonds, as well as bonds issued by federal agencies, state and local municipalities, and corporations.

fixed-income capital market

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The performance of _________, therefore, is tied directly to the success of the firm and its real assets. For this reason, they tend to be riskier than investments in debt securities.

equity investments

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an ownership share in a corporation

equity

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Securities providing payoffs that depend on the values of other assets.

derivative securities

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We stated earlier that ______ determine the wealth of an economy, while _________ merely represent claims on real assets

real assets, financial assets

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Such a large group of individuals obviously cannot actively participate in the day-to-day management of the firm. Instead, they elect a __________ that in turn hires and supervises the management of the firm. This structure means that the owners and managers of the firm are different parties.

board of directors,

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Conflicts of interest between managers and stockholders.

agency problems

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Allocation of an investment portfolio across broad asset classes.

asset allocation

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Choice of specific securities within each asset class.

security selection

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Analysis of the value of securities.

security analysis

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Assets with higher expected returns entail greater risk.

risk return tradeoff

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Buying and holding a diversified portfolio without attempting to identify mispriced securities.

Attempting to identify mispriced securities or to forecast broad market trends.

passive management, active management

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Institutions that “connect” borrowers and lenders by accepting funds from lenders and loaning funds to borrowers.

financial intermediaries

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Firms managing funds for investors. An investment company may manage several mutual funds

investment companies

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Firms specializing in the sale of new securities to the public, typically by underwriting the issue.

investment bankers

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a market in which new issues of securities are offered to the public

primary market

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markets in which previously issued securities are trades among investors

secondary market

But that stand-alone model came to an abrupt end in September 2008, when all the remaining major U.S. investment banks were absorbed into commercial banks, declared bankruptcy, or reorganized as commercial banks. The nearby box presents a brief introduction to these events.

Money invested to finance a new, privately held firm. Sources include dedicated _____ funds, wealthy individuals known as angel investors, and institutions such as pension funds.

venture capital (VC)

Investments in companies whose shares are not traded in public stock markets.

private equity

Pooling loans into standardized securities backed by those loans, which can then be traded like any other security.

securitization/mortgage-backed securities,”

What are you gambling on when investing?

productivity, over time increasing

A security has two sources of returns, what are they?

Cash flow coming to you and price appreciation/depreciation

how much an asset returned over and above the risk free rates

risk premium or excess return

defined as earnings before interest plus depreciation minus taxes, measures the cash generated from operations not counting capital spending or working capital requirements.

operating cash flow

One of the reasons cash flow analysis is popular is ....

the difficulty in manipulating, or spinning, cash flows

consists of very short-term, highly marketable debt securities. What are the most marketable?

money market, treasury bills

Short-term government securities issued at a discount from face value and returning the face amount at maturity.

treasury bills Unlike most other money market instruments, which sell in minimum denominations of $100,000, T-bills sell in minimum denominations of only $100, although $10,000 denominations are far more common. While the income earned on T-bills is taxable at the federal level, it is exempt from state and local taxes, another characteristic distinguishing bills from other money market instruments.

A bank time deposit.

A certificate of deposit (CD) is a time deposit with a bank. Time deposits (in contrast to “demand deposits” or checking accounts) may not be withdrawn on demand.

Short-term unsecured debt issued by large corporations.

commercial paper

Dollar-denominated deposits at foreign banks or foreign branches of American banks.

Eurodollars

Short-term sales of securities with an agreement to repurchase the securities at a higher price.

repurchase agreements (repos)

Just as most of us maintain deposits at banks, banks maintain deposits of their own at

the Federal Reserve Bank, or the Fed.

Funds in the accounts of commercial banks at the Federal Reserve Bank.

federal funds

Lending rate among banks in the London market.

London Interbank Offer Rate (LIBOR)

The______ is composed of longer-term borrowing or debt instruments than those that trade in the money market. This market includes Treasury notes and bonds, corporate bonds, municipal bonds, mortgage securities, and federal agency debt.

bond market

These bond market are sometimes said to comprise the _____ because most of them promise either a fixed stream of income or stream of income that is determined according to a specified formula.

fixed-income capital market

The U.S. government borrows funds in large part by selling

Treasury notes and bonds.

Debt obligations of the federal government with original maturities of one year or more.

Treasury notes or bonds

Tax-exempt bonds issued by state and local governments.

municipal bonds

A good deal of the municipal bonds issued is in the form of _________ that raise funds to pay for expenses before actual collection of taxes

short-term tax anticipation notes

Long-term debt issued by private corporations typically paying semiannual coupons and returning the face value of the bond at maturity.

corporate bonds

Ownership shares in a publicly held corporation. Shareholders have voting rights and may receive dividends.

common stocks

Nonvoting shares in a corporation, usually paying a fixed stream of dividends.

preferred stock

An average computed by adding the prices of the stocks and dividing by a “divisor.”

price-weighted average

market value–weighted index

Index return equals the weighted average of the returns of each component security, with weights proportional to outstanding market value.

A security with a payoff that depends on the prices of other securities.

derivative asset

The right to buy an asset at a specified exercise price on or before a specified expiration date. The right to sell an asset at a specified exercise price on or before a specified expiration date. Obliges traders to purchase or sell an asset at an agreed-upon price at a specified future date.

call option Put futures contract

Primary offerings in which shares are sold directly to a small group of institutional or wealthy investors.

private placement`

First public sale of stock by a formerly private company.

Initial public offering

___________purchase securities from the issuing company and resell them to the public.

Underwriters

A description of the firm and the security it is issuing.

prospectus

purpose of road shows

First, they generate interest among potential investors and provide information about the offering. Second, they provide information to the issuing firm and its underwriters about the price at which they will be able to market the securities.

Interestingly, despite their typically attractive first-day returns, IPOs have, on average, been______

poor long-term investments

The primary market, where new issues of securities are offered to the public, is another example of a

brokered market.

The New York Stock Exchange (NYSE) is an example of an

auction market.

The price at which a dealer or other trader is willing to purchase a security. The price at which a dealer or other trader will sell a security. bid–ask spread The difference between the bid and asked prices.

bid price ask (or asked) price ask (or asked) price

An order specifying a price at which an investor is willing to buy or sell a security.

limit buy (sell) order

The computer-linked price quotation and trade execution system.

NASDAQ Stock Market

Describes securities purchased with money borrowed in part from a broker. The margin is the net worth of the investor’s account

margin

The sale of shares not owned by the investor but borrowed through a broker and later purchased to replace the loan.

short sale

Financial intermediaries that invest the funds of individual investors in securities or other assets.

investment companies

A private investment pool, open to wealthy or institutional investors, that is largely exempt from SEC regulation and therefore can pursue more speculative policies than mutual funds.

hedge fund