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Financial Economics > Quiz 2 Vocab > Flashcards

Quiz 2 Vocab Flashcards

1
Q

Residual Claimant

A

The right as a stockholder to to receive whatever remains after all other claims against the firm’s assets have been satisfied

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2
Q

Dividends

A

Periodic payments made by equities to shareholders (from companies earnings)

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3
Q

Adaptive Expectations

A
  • 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
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4
Q

Rational Expectations

A

Expectations that reflect optimal forecasts (best guess of the future) using all available information

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5
Q

Tail-Event

A
  • Unlikely event
  • in the tail of normal distribution
  • usually not taken into account for rational expectation’s optimal forecast
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6
Q

Arbitrage

A
  • Elimination of risk-less profit opportunity in a market

- taking advantage of disequilibrium in prices as to exploit risk-less profits

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7
Q

Bubbles

A
  • 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
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8
Q

Collateral

A

Property that is pledged to the lender to guarantee payment in the event that the borrower is unable to make debt payments

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9
Q

Principal Agent Problem

A
  • 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
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10
Q

Return on Equity (ROE) / Capital

A
  • net profit after taxes per dollar of equity capital
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11
Q

Credit Risk

A

The risk arising from the possibility that the borrower will default

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12
Q

Loan Commitment

A

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

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13
Q

Interest Rate-Risk

A

The possible reduction in returns associated with changes in interest rates

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14
Q

Value at Risk (VaR)

A

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

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15
Q

Stress Tests

A

Tests of financial institutions that calculate losses and the need for more capital under fire scenarios
- internal control

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16
Q

Equity Contracts

A

Claims to a share in the profits and assets of a business

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17
Q

Costly State Verification

A

Monitoring a firm’s activities, an expensive process in time and money

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18
Q

Debt Contract

A

contractual agreement by the borrower to pay the lender fixed dollar amounts at periodic intervals

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19
Q

Spinning

A

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

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20
Q

Management Advisory Services

A

When an accounting firm provides auditing services and non-auditing services

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21
Q

Reputational Rents

A

Profits a firm earns because it is trusted by the marketplace

22
Q

Efficient Market Hypothesis

A

Application of the theory of rational expectations to financial markets
• prices of securities fully reflect all available information

23
Q

Asset Transformation

A

Sell liabilities with one set of characteristics and use proceeds to buy assets with different set of characteristics

24
Q

Liquidity Management

A

acquisition of sufficiently liquid assets to meet bank’s obligations to depositors

25
Q

Asset Management

A

Acceptably low level of risk by acquiring by assets that have a low rate of default and by diversification

26
Q

Liability Management

A

Acquire funds at low cost

27
Q

Capital Adequacy Management

A

Manager must decide the amount of capital to maintain and then acquire the needed capital, manage credit risk and IR risk

28
Q

Return on Assets (ROA)

A

Net profit after taxes / assets

29
Q

Compensating Balances

A

A firm receiving a loan must keep a required minimum amount of funds in checking account at bank

30
Q

Credit Rationing

A

Refusing to make loans even to borrowers that are WTP stated IR or higher

31
Q

Gap Analysis

A

Amount of rate-sensitive liabilities is subtracted from amount of rate-sensitive assets

32
Q

Maturity Bucket Approach

A

Measure the gap for several maturity subintervals so effect of IR changes over a multiyear period

33
Q

Duration Analysis

A

Examines sensitivity of the market value of the bank’s total assets and liabilities to changes in IR

34
Q

Off- Balance Sheet Activities

A

Trading financial instruments and generation income from fees and loan sales

35
Q

Loan Sale

A

A contract that sells all/part of the cash stream from a specific loans and removes the loan so the loan is no longer an asset on the bank’s balance sheet

36
Q

Financial Derivatives

A

Instruments that have payoffs that are linked to previously issued securities

  • used as risked reduction tools
  • financial product whose payoffs derive from existing security
37
Q

Hedge

A

insure/protect yourself from risk

38
Q

Long (position)

A

1) buy something hoping to make a profit

2) holding/ agreeing to hold something

39
Q

Short (position)

A

1) selling something hoping to make a profit

40
Q

Spot (Price)

A

Price right now

41
Q

Forward

A

Price on a later date

42
Q

Forward Contract

A

agreement between two parties to sell a specific asset on a specific date for a specific price

43
Q

Future Contract

A

A tradable agreement to buy/sell a specific asset/contracts of that asset by a specific delivery date

44
Q

Call Option

A

right to buy a specific asset at a particular price within a specific period

45
Q

Put Option

A

the right to sell a specific asset at a particular price within a specific period

46
Q

Mark to Market / Fair-Value Accounting

A

assets valued in balance sheet at what they could sell for in the market (regulators make fin institutions do this)

47
Q

Deposit Rate Ceilings

A

Restriction on paying interest on checking account

48
Q

Superregional Banks

A

Bank holding companies that rival the money center cities in size but are not HQ’d in the money cities

49
Q

Annuity

A

Arrangements whereby customer pays for an annual premium in exchange for a future stream of annual payments beginning at a set age

50
Q

Reinsurance

A

allocates portion of risk to another company in exchange for a portion of the premium

51
Q

Credit Default Swaps

A

a tradable derivative in which the seller is required to make a payment to the holder of the CDS if there is a credit event for that instrument
- insurance for a debt instrument

Financial Economics (6 decks)

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