CTP Chapter 3

Question 1

The price or yield at which a dealer will sell a security.

Answer 1

ask price

Question 2

A financial statement that reports a company’s financial condition—including assets, liabilities, and shareholders’ equity—at a point in time. Also called a statement of financial position.

Answer 2

balance sheet

Question 3

The price or yield at which a dealer will purchase a security.

Answer 3

bid price

Question 4

An entity that serves as an intermediary in the purchase and sale of capital market securities. It trades securities for its own account or on behalf of its customers. When executing trade orders on behalf of a customer, the institution acts as a broker. A broker that executes trades for its own account is also a dealer, and may be referred to as a brokerage firm.

Answer 4

broker-dealer

Question 5

A factor that measures whether the amount of capital maintained relative to the nature and extent of an institution’s risks is sufficient given management’s ability to identify, measure, monitor, and control these risks.

Answer 5

capital adequacy

Question 6

A subsidiary of a large industrial corporation that finances purchases of the corporation’s products.

Answer 6

captive finance company

Question 7

The capital contributed by stockholders and earnings retained in the business. Also refers to an account on corporate financial statements that reflects this amount.

Answer 7

common equity

Question 8

An account through which an account holder uses a bank to transfer funds to, and receive deposits from, a third party. Also known as a checking account or a current account.

Answer 8

demand deposit account (DDA)

Question 9

A regulatory safeguard that protects the assets of smaller deposit customers (typically consumers, although corporate accounts are also often covered up to a certain amount) who would be most harmed by a bank failure.

Answer 9

deposit insurance (deposit guarantee)

Question 10

A brokerage firm that lets investors make trades at reduced prices, but provides little or no investment advice.

Answer 10

discount brokerage

Question 11

An investment bank function that involves a securities sale to investors by an investment bank or syndicate of investment banks (sometimes performed by a brokerage firm on behalf of the investment bank or syndicate).

Answer 11

distribution

Question 12

An individual or institution to which certain property is given to hold in trust according to a trust agreement.

Answer 12

fiduciary

Question 13

A bank account where deposit balances may be held in a currency other than that of the country in which the bank is located.

Answer 13

foreign currency account

Question 14

The conversion of one country’s currency into that of another

Answer 14

foreign exchange (FX)

Question 15

A financial market in which contracts for future delivery (futures) of currency or commodities are bought and sold

Answer 15

forward market

Question 16

A regulatory restriction on the amount that a financial institution can lend or invest in a particular company or industry, based on the quality of the financial institution’s existing loan portfolio.

Answer 16

impairment of capital rule

Question 17

A type of nonbank financial institution that sells insurance products. From a corporate perspective, insurance companies are primarily long-term lenders to companies. They are significant investors in real estate, particularly commercial real estate (e.g., shopping centers), as well as long-term bonds. Insurance companies also compete with banks for short- and medium-term loans. They provide mortgage funding, leasing services, guaranteed investment contracts (similar to bank certificates of deposit, generally paying interest for one to five years), and universal life insurance policies with long-term savings features.

Answer 17

insurance company

Question 18

A financial intermediary that performs a variety of services, such as: (1) underwriting, by acting as an intermediary between an issuer of securities and the investing public; (2) providing custodial services; (3) facilitating mergers, acquisitions, divestitures, and other corporate reorganizations; and (4) acting as a broker/financial advisor for institutional clients.

Answer 18

investment bank

Question 19

Types of debt (bonds or notes) issued by city, county, or state government entities that generally have some type of income tax exemption for any interest paid on them. Commonly called munis.

Answer 19

municipal securities

Question 20

An investment of either common or preferred stock in an operating company that is not publicly traded on an exchange. This investment sometimes involves the acquisition of an entire company.

Answer 20

private equity

Question 21

The practice of the direct sale of long-term loans to institutional investors, such as insurance companies and hedge funds.

Answer 21

private placement

Question 22

A central bank requirement that establishes the minimum percentage of customer deposits that financial institutions must hold as reserves and not lend out to other customers. This is an important part of managing monetary policy. In the United States, it is also a factor in the computation of earnings credits, since it represents a US financial institution’s compensation for the level of balances it is required to maintain with the Federal Reserve. Since 2020, the Federal Reserve has set the reserve requirement rate at 0%.

Answer 22

reserve requirement

Question 23

A committed line of credit established for a specified period of time, often on a multiyear basis. These credit agreements are formal, contractual commitments with loan agreements, including covenants.

Answer 23

revolving credit agreement (revolving line of credit)

Question 24

Government revenue from the issuance of coin and currency, which is based on the difference between the value of the money and the cost to produce it. Historically, it arose from the manufacture of coins, which were worth more than the metal used to mint the coins.

Answer 24

seigniorage

Question 25

The market for immediate trading of currency or commodities

Answer 25

spot market

Question 26

The difference between the bid and ask price of a particular security or asset. Represents the dealer’s gross profit on a specific transaction.

Answer 26

spread

Question 27

An analytical exercise that assumes an adverse change in one or more of a firm’s funding sources, or a major shock to a company’s core business due to a litigation crisis, competitor’s action, product recall, production plant disaster, financial crisis, or other source of business trauma. The proposed change in funds availability may involve the loss of one or more of a firm’s borrowing facilities, a sudden and large increase in borrowing costs, or both. Such changes may reduce the firm’s credit rating, violate loan covenants, or cause a technical default on a credit facility.

Answer 27

stress test

Question 28

The act of requiring a purchaser to buy one product or service in order to be allowed to buy a second, typically unrelated, product or service

Answer 28

tying

Question 29

A bank that offers both commercial and investment banking services, with investment banking services offered through the investment banking arm of a commercial bank’s holding company.

Answer 29

universal bank