Quiz 2 Vocab Flashcards
Residual Claimant
The right as a stockholder to to receive whatever remains after all other claims against the firm’s assets have been satisfied
Dividends
Periodic payments made by equities to shareholders (from companies earnings)
Adaptive Expectations
- Expectations of a variable based on an average of past values of the variable
- expectations of the future are informed solely based on past experiences
Rational Expectations
Expectations that reflect optimal forecasts (best guess of the future) using all available information
Tail-Event
- Unlikely event
- in the tail of normal distribution
- usually not taken into account for rational expectation’s optimal forecast
Arbitrage
- Elimination of risk-less profit opportunity in a market
- taking advantage of disequilibrium in prices as to exploit risk-less profits
Bubbles
- A situation in which the price of an asset differs from its fundamental market value
- run up in prices beyond any fundamental valuation/ beyond any expected optimally forecasted value
Collateral
Property that is pledged to the lender to guarantee payment in the event that the borrower is unable to make debt payments
Principal Agent Problem
- A moral hazard problem that occurs when the managers in control (agents) act in their own interest rather than in the interests of the owners (principals) due to different sets of incentives
Return on Equity (ROE) / Capital
- net profit after taxes per dollar of equity capital
Credit Risk
The risk arising from the possibility that the borrower will default
Loan Commitment
A bank’s commitment to provide a firm with loans up to a given amount at an interest rate that is tied to some market interest rate
Interest Rate-Risk
The possible reduction in returns associated with changes in interest rates
Value at Risk (VaR)
Calculations that measure the size of the loss on a trading portfolio that might happen 1% of the time over a short period
- internal control
Stress Tests
Tests of financial institutions that calculate losses and the need for more capital under fire scenarios
- internal control
Equity Contracts
Claims to a share in the profits and assets of a business
Costly State Verification
Monitoring a firm’s activities, an expensive process in time and money
Debt Contract
contractual agreement by the borrower to pay the lender fixed dollar amounts at periodic intervals
Spinning
When an investment bank allocates shares of hot, but underpriced initial public offerings to executives of other companies in return for their companies’ future business with the investment bank
Management Advisory Services
When an accounting firm provides auditing services and non-auditing services
Reputational Rents
Profits a firm earns because it is trusted by the marketplace
Efficient Market Hypothesis
Application of the theory of rational expectations to financial markets
• prices of securities fully reflect all available information
Asset Transformation
Sell liabilities with one set of characteristics and use proceeds to buy assets with different set of characteristics
Liquidity Management
acquisition of sufficiently liquid assets to meet bank’s obligations to depositors
