Reading #46 Flashcards

1
Q

Three main functions of the fin. system

A
  1. allow entities to save & borrow money 2. determine returns that = supply and demand 3. allocate capital to most efficient use
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

equilibrium int. rate

A

rate which amt of individ., bus, and govt desire to borrow = desire to lend

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

define debt securities

A

promises to repay funds

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

define equity securities

A

represent ownership positions

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

define derivative contracts

A

values depend on values of other assets

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

financial derivative contracts versus physical der. contracts

A

financial based on equities, debt, etc, physical based on value of gold, oil, wheat, etc

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

define spot market

A

markets for immediate delivery

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

primary versus secondary market

A

primary is for newly issued securities vs subsequent sales is secondary market

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

money market vs. capital market

A

money market is for less than year, capital is for longer term debt and equity securities

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

traditional investment markets vs alt. markets

A

trad = debt and equity, alt = hedge funds and etc

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

define common stock

A

residual claim on firm’s assets

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

definte preferred stock

A

equity security with scheduled dividends that do not change usually over security’s life

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

define warrants

A

similar to options (giving right to buy firm’s equity shares) at fixed exercise price prior to expiration

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

types of pooled investment vehicles

A

mutual funds, depositories, and hedge funds

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

forward vs future contract

A

forward is agreement to buy sell asset in future as specific price and not traded on exchanges. future is standardized so that they are liquid investments

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

define swap contract

A

2 parties make equal payments to one asset being traded for another .(currency swap = one loan in 1 currency for loan of another currency)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

define option contract

A

gives owner right to buy or sell asset at specific exercise price at some specified time in the future

18
Q

CALL VS PUT Option

A

call = gives buyer right to buy option, put = right to sell the

19
Q

define insurance contract

A

pays cash amt if future event occurs

20
Q

define credit default swaps

A

form of insurance that makes a payment if an issuer defaults on its bonds

21
Q

define a financial intermediary

A

stands between buyer and seller

22
Q

define a dealer

A

they facilitate trading by buying for or selling from their own inventory

23
Q

define broker-dealer

A

they seek best prices but goal is to profit through prices or spreads

24
Q

define securitizer

A

pool large amounts of securities and then sell interest in the pool to other investors (ex. mortgages)

25
examples of depository institutions
banks, credit unions, savings and loans. they pay int. on customer deposits and provide transaction services such as checking accounts
26
insurance companies - primary or intermediary?
intermediary that collect insurance premiums in return for providing risk reduction to insured
27
define moral hazard
when insured may take more risks once is he is protected against losses
28
define adverse selection
when most likely to experience losses are most likely to buy insurance
29
define arbitrage
buying an asset in one market and reselling in another at a higher price
30
define clearing house
intermediaries btwn buyer and seller for things like escrow services
31
define counterparty risk
risk that other party to transaction will not fulfill obligation
32
LONG v. SHORT Position
long = right/obligation to purchase an asset, short = right/obligation to replace asset in future
33
define payment in lieu of dividends
in a short sale, when short seller must pay all div to lender
34
define short rebate rate
rate that broker would earn from interest on funds
35
define leverage position
use of borrowed funds to purchase and asset
36
define buying on margin
investors who use leverage to buy securities by borrowing from their brokers
37
define call money rate
interest rate paid on leveraged funds - generally higher than govt' bill rate, but lower for larger investors with better collateral
38
define initial margin requirement
min. amt of equity for new margin purchase
39
who decides the amt for initial margin requirement?
govt, exchange, broker or clearinghouse
40
define leverage ratio
value of asset / value of equity position