SU3: Financial Markets Flashcards
Advantages of going public include
The ability to raise additional funds
The establishment of the firm’s value in the market
An increase in The liquidity of The firm’s stock
Disadvantages of going public include
Costs of the reporting requirements of the SEC and other agencies
Access to the company’s operating data by competing firms
Access to net worth information of major shareholders
Limitations on self-dealing by corporate insiders, such as officers and major shareholders
Pressure from outside shareholders for earnings growth
Stock prices that do not accurately reflect the true net worth of the company
Loss of control by management as ownership is diversified
Need for improved management control as operations expand
Increased shareholder servicing costs
Return
Amount received - amount invested
Rate of Return
Return on investment / amount invested
Systematic Risk is also known as
Market risk
Market risk is
the rist faced by all firms
Unsystematic risk is also known as
nonmarket or company risk CANNOT be offset by portfolio diversification
Unsystematic risk defined
the risk inherent in a particular investment security
Credit risk
the risk that an issuer of a debt security will default
Foreign exchange risk
the risk that a foreign currency transaction will be affected by fluctuations in exchange rates
Interest rate risk
the risk that an ivnestment security will fluctuate in value due to changes in interest rates
Industry risk
risk that a change will affect securities issued by firms in a particular industry
Political risk
is the probability of loss caused by such government actions as expropriation of assets or changes in laws
Liquidity risk
is the risk that a security cannot be sold on short notice for its market value
Financial risk
is the risk of an adverse outcome based on a change in the financial markets, such as changes in interest rates or changes in investors’ desired rates of return
Purchasing power risk
is the risk that a general rise in the price level will reduce the quantity of goods that can be purchased with a fixed sum of money
The systematic risk of an individual security is measured by the
Covariance between the securitys returns and the general market
Stated Rate
What the bond will pay
Market Rate
Current market rate
Conversion Ratio
Par Value of Convertible Bond / Conversion Price
The efficient markets hypothesis states that it is impossible to obtain abnormal returns consistently with either or analysis
Technical, Fundamental
The term “underwriting spread” refers to the
Difference between the price the investment banker pays for a new security issue and the price at which the securities are resold.
Describe the efficient market hypothesis
The expected return of each security is equal to the return required by the marginal investor given the risk of the security
Define Fundamental Analysis
is a method of evaluating securities by attempting to measure the intrinsic value of a stock
Define Technical Analysis
differs from fundamental analysis in that the stock’s price and volume are the only inputs
Strong form (efficient market)
All public and private information is reflected in sales price. Insider trading cannot assume abnormal returns.
Semistrong form (efficient market)
All public data are reflected in sales price, but insider/private information is not. Insider trading can result in abnormal returns.
Weak form (efficient market)
Current securities prices only reflect past price movement data, technical analsys will not provide a basis for abnormal returns.
What transaction involes a large number of new shares issued to replace all outstanding shares?
Stock split
Where do bond issue costs show on the financial statements?
Direct deductions from the face amount of the debt.
Debentures are
bonds secured by the full faith and credit of the issuing firm - unsecured.
The par value of common stock represents
The liability ceiling of a shareholder when a company undergoes bankruptcy proceedings.
The financial markets that trade debt securities with maturities of less than 1 year and are dealer-driven are
Money Markets
