410 - Exam 1 Flashcards

Question

firms often acquire short-term debt by issuing ___ to the public

Answer 1

commercial paper

Answer 2

1. notes - up to 10 years | 2. bonds - 10-30 years

Answer 3

the price at which a dealer in treasury bills is willing to buy the bill

Answer 4

the rate banks charge each other for over night loans to meet reserve requirements

Answer 5

loose network of brokers and dealers

Answer 6

hybrid exchange and dealer market | --used to be a pure dealer mkt. - almost a third mkt. - used to have to pick up the phone and call the broker

Answer 7

dealer mkt.

Answer 8

funds are heavily regulated by SEC (NOT VERY REGULATED) the ones that were true was: investors pay relatively high fees that depend on fund performance, inv. often not allowed to sell back shares for long periods of time, wide use of short-sells

Answer 9

can't control returns as an investor but can control your COSTS --can reduce costs to inc. returns at zero risk!! EXPLICIT TRADING COSTS - -brokerage commissions and exchange fees - -any trading cost known in advance with certainty IPMLICIT TRADING COSTS - -don't pay them separately...embedded in prices you receive - ever know until after the trade...and still not completely obvious - -the 2 main ones are market impact (Trading may move prices up for buyers and down for sellers) and slippage (opp. cost for incomplete execution (inability to buy or sell desired quantity at time planned) or delays) can measure them by the bid-offer spread - get a sense of the cost of trading

Answer 10

measured as the diff. btwn the bid and offer prices at the top of the book - -larger bid-offer spreads signal higher trading costs and LESS mkt. liquidity - -often orders exceed the quantity available at top of the book and must then walk the book being filled at decreasingly favorable prices effective spread is TWICE the diff. btwn the quantity-weighted average price and the midpoint (average) of the top of the book before the transaction bid-offer spread is useful summary of statistic mkt. conditions..but does not reflect the entirety of what it costs to trade...2 types of implicit costs: market impact and slippage

Answer 11

when you buy shares, they are held by a custodian or entity that acts as a safe keeper of your shares - like a bank for shares - -just like in a bank - the shares don't just sit around - the custodian lends them out - borrow shares bc can have short sales - -short sales - transaction where someone borrows a security held in custody then sells it hoping to repurcahse it later at a LOWER price - -a short seller pays a borrow cost to rent the shares - securities lending is a source of revenue to custodian banks

Answer 12

financial intermediaries who invest on behalf of individuals who provide capital such as mutual funds, that represent imp. players with growing ownership stakes in fin. mkts. benefits of investment comp. (Rather than buying indiv. securities directly) 1. CHEAP DIVERSIFICATION - brokers charge a fixed fee for services...so it can be costly for an indiv. investor to purchase a broad portfolio...but an investment company can spread this cost over many investors, which lowers the cost of diversification 2. RECORD KEEPING AND ADMIN. - -inv. companies issue periodic status reports - keep track of capital gains, dividends, investments and redemptions 3. PROFESSIONAL MGMT. - -teams of analysts and portfolio managers who do research and select securities in an attempt to provide superior performance

Answer 13

investors buy shares in inv. companies and ownership is proportional to # shares purcahsed --value of each share is called Net asset value (NAV) = (mkt. value of assets - liabilities) / # shares outstanding

Answer 14

majority are OPEN END funds - -raise capital by issuing shares to the public - -use capital raised to buy a portfolio of fin. securities - -each share represents partial ownership of the assets owned by the fund - -can be actively or passively managed - -passively managed funds called INDEX FUNDS - replicate performance of an index or basket of securities in these cases - investors buy and sell shares of open-ended funds directly from the investment company itself or from brokers authorized by inv. comp. ---ex. Charles Schwab is authorized broker for a variety of mutual fund companies What price to pay for share of a mutual fund? - -all new orders during a given day pay the 4pm NAV - -when ordering, investors indicate dollar amt. they wish to buy or sell rather than # of shares...at 4pm the inv. comp. calculates the fund's NAC (exluding order flow that day to avoid dilution effects) - then any buy or sell orders are executed at the 4pm NAV - -if buy orders > sell orders --the fund issues more shares of the fund, or if sell > buy the fund buys back the shares - -# shares outstanding for open-end mutual fund changes almost every trading day

Answer 15

ETF - like an index fund that trades like a stock - -inv. comp. raises capital by issuing shares - the capital is invested in a pool of assets and the shares represent a claim to CFs generated by the pool - shares then trade on an exchange like a stock - -so when you buy or sell an ETF you trade with another investor at real time prices (ADVANTAGE OVER INDEX FUNDS) - -ETFs can also be SHORTED and index funds can't value ETFs bc know what securities are in the pool of assets backing the shares - report holdings on a daily basis --almost all passively managed - meaning track n index or basket of securities price of ETF is closely held to the value of the actual basket through arbitrage activity or authorized participants (AP) - large fin. institutions who act as ETF sponsor --price of ETF sponsors charge annual fees, but very small and similar to those of index fund - some even charge zero fees and make money by short selling one ADVANTAGE OF INDEX OVER ETF is that when you trade index funds, you avoid all explicit trading costs and many implicit trading costs - if have no loads...pay no cost to a broker, don't pay bid-offer spread, and don't walk the book - simply buy the 4pm NAV

Answer 16

inv. companies that raise capital using investment strategies that include derivatives, short positions and leverage - -many try to follow market neutral strategies by going long and some short others - -not subject to SEC regulation and open only to accredited investors with et worth over $1M

Answer 17

funds that issue a fixed number of shares - ones the shares are issued they trade on exchanges like a stock - -# shares outstanding is fixed, but assest of close-end funds are generally actively managed by fund managers - -rep. very smal fraction of total equity ownership

Answer 18

ETFs can create and redeem shares throughout the day...which keeps the stock price aligned with the NAV of the portfolio - -closed-end funds are fixed at the IPO and cannot expand or contract based on market activity - -the closed end funds are often sold at a discount and cannot be adjusted

Answer 19

in a mutual fund - ann expenses used to pay authorized brokers who enable investors to buy and sell the funds as well as marketing and distribution costs --controversial bc sometimes charged without inv. knowledge (CHECK CLASS NOTES)

Answer 20

Mutual funds --buy publicly traded securities - little use of leverage or short sales (HEDGE - can also buy non-public securitires = wide use of leverage and short sales) --mutual - hold broad mix of assets (HEDGE - holdings are often concentrated) --mutual - low fees that do not depend on performance (HEDGE - High fees that depend on performance) --mutual - investors can sell back shares at any time (HEDGE - investor money is locked up for long periods) --mutual - heavy regulation (HEDGE - light regulation) --mutual - relatively low initial investments (HEDGE - very high investments necessary)

Answer 21

front end load represents a fixed cost that is spread over more years the longer you hold the investment, --the shorter you hold it, the higher fund return must be to make up the cost

Answer 22

also called "intrinsic value" or "theoretical price" - -help us see if the current price of a security is NOT the equilibrium price - -if Price less than PV - we get higher return than the rquired expected return - means as prices move towards its equilbirum, we get a higher return than other securities with similar risk - -DDM models do not tell us WHEN market prices will move back to equilibrium - -don't invlude risk either - -relies on assumptions to estimate future dividends - using CAPM DDM gives us the PV of future forecasted dividends as an eqution - tells us the price we should pay for a security if we want an effective return equal to the chosen discount rate grodon growth - for K for rf use rate on other risk free assets - or risky assets use CAPM to estimate --for growth - use company's historical average growth rate in dividends, use an industry median or average growth rate, or use the SUSTAINABLE GROWTH RATE ``` SGR = b*ROE (ROE * PLOWBACK) --b = plowback ratio, 1-b = payout ratio ```

Answer 23

4 stages: 1. first 2 years 2. long-term growth stage 3. transitional stage 4. mature stage1

Answer 24

os a combination of the asset with the MAX sharpe ratio and some measure of risk-free borrowing or lending

Answer 25

The weighted average of the gross returns for each individual asset in the portfolio where the weight in each asset is the fraction of investment equity invested in that asset

Answer 26

# Choose desired target portfolio weights Does not require rebalancing —find Mkt. cap then weights —S&P 500 index

Answer 27

Dow Jones industrial average is most widely cited and influential price index —Charles Dow creates first and posted average price of companies stock within it (not average return) every day Price weighted - when buy equal number of shares of every security —weight in each security depends on its price — higher share price = higher weight SPLITS IMP HERE —occurs when come. Cuts price of its shares outstanding in half and doubles the shares outstanding - gives 2 shares to current holders but value cut in half —stock split has NO impact on value of an investors holdings

Answer 28

The amount of MONEY invested in each security is the same | —

Answer 29

One way to increase exposure of a portfolio to a SINGLE security -tilt towards - borrow at rf rate to add weight to a security —tilt away - sell shares of a security and invest in risk free bonds

410 - Exam 1 Flashcards

(53 cards)