TI

Question 1

money market instruments

Answer 1

Treasury Bills
Federal Funds
Repurchase agreements (Repos or RPs)
Certificate of Deposits
Commercial Paper
Eurodollar
LIBOR (London Interbank Offer Rate)

Question 2

capital market instruments

Answer 2

Treasury Bonds
Corporate Bonds
Municipal Bonds
Common Stocks
Preferred Stocks
Depository receipts

Question 3

money market characteristics

Answer 3

maturity less 1 year
liquidity high
risk low
return low
trading no formal place
transaction size large 
role
liquidity adjustments, government needs

Question 4

capital market characteristics

Answer 4

maturity more than 1 year
liguidity low
risk high
return high
trading formal place
transaction size small amount 
role
capital requirements of companies

Question 5

treasury bills

Answer 5

issuer federal government
riskless investment
interest income exempt from state and local taxes but subject to federal taxes
sold at face value

Question 6

federal funds

Answer 6

reserves banks have to keep at FED

banks with surplus lend to other banks

Question 7

Repurchase agreements

Answer 7

Short-term collateralized loan
Borrower, usually a government securities dealer, sells securities (e.g., fixed income securities) to a lender with an agreement to buy back securities at a future date at a specific (higher) price
Securities serve as collateral

Question 8

LIBOR

Answer 8

Premier short–term interest rate at which large banks in London (and elsewhere) lend to each other

Question 9

treasury Eurodollar TED spread

Answer 9

Indicator of perceived credit risk in the economy
An increase in the TED spread  Lenders believe the risk of default on interbank loan (i.e., counterparty risk is increasing)

A decrease in the TED spread  The risk of bank defaults decreases

Question 10

Certificate of Deposits

Answer 10

Time deposit with a depository institution

Fixed term and usually pays a fixed interest rate greater than saving accounts.

Question 11

Commercial Paper

Answer 11

Unsecured short-term debt note issued by large creditworthy corporations
Sold at discount and the interest rate depends on the creditworthiness of the corporation

Question 12

Eurodollar

Answer 12

Dollar-denominated (time) deposits held at foreign banks or foreign branches of American banks

Question 13

Bond Instruments

Answer 13

Longer term borrowing
Include fixed income securities with maturities greater than one year
Fixed cash flows: coupons/interest payment
But bonds are NOT risk-free
Issued by
Federal Government (Treasury notes/bonds)
State and local governments (Municipal bonds)
Firms (Corporate Bonds)

Question 14

Treasury Bonds

Answer 14

Issued by the federal government over a broad range of maturities
1 to 10 years -> Treasury Notes, 10 to 30 years -> Treasury Bonds
Semiannual coupon + repay principal (face value) on the maturity date

Question 15

Municipal Bonds

Answer 15

Issued by states, counties, cities, and so forth other than the federal government or its agencies
Default (in rare cases) and interest is exempt from federal and state tax
Because of the tax-exempt feature of municipal bonds, they sell at a lower promised yield than non-municipal bonds of the same risk

Question 16

Corporate Bonds

Answer 16

Similar to government bonds in payment pattern: coupon + principal (face value) at maturity
Have the risk of default. Rated as to quality by agencies (S&P, Moody’s).

Question 17

Common stocks(equity instruments)

Answer 17

Represent ownership claim on the earnings and assets of a corporation
 The holder of common stocks has:
Voting rights
Limited liability
Residual claim

Question 18

Preferred stocks

Answer 18

At first blush resembles an infinite life bond
Periodic payments like coupons, but called dividends rather than interest
No principal like in a bond or no bankruptcy if dividends are not paid
Priority over common stocks
Can be callable, convertible, or adjustable-rate

Question 19

Depository receipts

Answer 19

Certificates traded in the U.S. representing ownership in foreign security

Question 20

market indexes

Answer 20

Provide a broad representative portfolio of investment holdings
Used as benchmarks to gauge the movement and the performance of the overall stock market or market segments
Used as a basis for passive investing
Used as benchmarks to assess the performance of active investors

Question 21

Price-weighted index

Answer 21

Each company makes up a fraction of the index proportional to its price.
In its simplest form, adding the prices of each stock and dividing by the total # of companies determine the index’s value

Question 22

Market-value-weighted index

Answer 22

Each company makes up a fraction of the index proportional to its market value (price * shares outstanding)
Index value is derived by sum of market value divided by a divisor

Question 23

Value Line Index

Answer 23

Simple average of returns

Placing equal weights on each return is a strategy that places equal dollar values in each stock

Question 24

derivative market instruments

Answer 24

Options
Future contracts
Forward contracts
Swaps

Question 25

Options

Answer 25

gives the holder the right to either buy (a call option) or sell (a put option) an asset at a specific price (strike price) on or before a specified expiration date
The buyer (option holder) pays a price for the option (option premium) but is free not to exercise it.
European options can be exercised only at expiry

Question 26

call option (buyer, seller )

Answer 26

Buyer :Has the right to buy the stock
Want the stock to appreciate in value
Pays the premium
seller : Has the obligation to sell the stock
Want the stock to depreciate in value
Collects the premium

Question 27

put option

Answer 27

buyer : Has the right to sell the stock
Want the stock to depreciate in value
Pays the premium
seller : Has the obligation to buy the stock
Want the stock to appreciate in value
Collects the premium

Question 28

Futures

Answer 28

The buyer (long position) is obliged to buy a particular asset at a particular time (maturity date) for an agreed-upon price, and the seller (short position) commits to delivering the asset at contract maturity.
Speculators such as portfolio managers or some retail investors can trade futures purely for profit as long as the trade is closed before expiration.