Ch 02 Key Terms

Question 1

Ask Price

Answer 1

The price at which a dealer will sell a security.

Question 2

Banker’s Acceptance

Answer 2

A money market asset consisting of an order to a bank by a customer to pay a sum of money at a future date.

Question 3

Bid Price

Answer 3

The price at which a dealer is willing to purchase a security

Question 4

Bid-Ask Spread

Answer 4

The difference between a dealer’s bid and ask price.

Question 5

Call Option

Answer 5

The right to buy an asset at a specified exercise price on or before a specified expiration date.

Question 6

Capital Gains

Answer 6

The amount by which the sale price of a security exceeds the purchase price.

Question 7

Captial Markets

Answer 7

Includes longer-term, relatively riskier securities.

Question 8

Certificate of Deposit

Answer 8

A bank time deposit.

Question 9

Commercial Paper

Answer 9

Short-term unsecured debt issued by large corporations.

Question 10

Derivative Assets

Answer 10

Securities providing payoffs that depend on or are contingent on the values of other assets such as commodity prices, bond and stock prices, or market-index values. Examples are futures and options.

Question 11

Equities

Answer 11

Ownership shares in a firm.

Question 12

Equivalent taxable yield

Answer 12

The pretax yield on a taxable bond providing an after-tax yield equal to the rate on a tax-exempt municipal bond.

Question 13

Eurodollars

Answer 13

Dollar-denominated deposits at foreign banks or foreign branches of American banks.

Question 14

Exercise (Strike) Price

Answer 14

Price set for calling (buying) an asset or putting (selling) an asset.

Question 15

Federal Funds

Answer 15

Funds in a bank’s reserve account.

Question 16

Futures Contract

Answer 16

Obliges traders to purchase or sell an asset at an agreed-upon price on a specified future date. The long position is held by the trader who commits to purchase. The short position is held by the trader who commits to sell. Futures differ from forward contracts in their standardization, exchange trading, margin requirements, and daily settling (marking to market).

Question 17

Index Funds

Answer 17

A mutual fund holding shares in proportion to their representation in a market index such as the S&P 500.

Question 18

Limited Liability

Answer 18

The fact that shareholders have no personal liability to the creditors of the corporation in the event of bankruptcy.

Question 19

London Interbank Offered Rate (LIBOR)

Answer 19

Rate that most creditworthy banks charge one another for large loans of Eurodollars in the London market.

Question 20

Market-Value-Weighted Index

Answer 20

An index of a group of securities computed by calculating a weighted average of the returns of each security in the index, with weights proportional to outstanding market value.

Question 21

Money Market

Answer 21

Includes short-term, highly liquid, and relatively low-risk debt instruments.

Question 22

Municipal bonds

Answer 22

Tax-exempt bonds issued by state and local governments, generally to finance capital improvement projects. General obligation bonds are backed by the general taxing power of the issuer. Revenue bonds are backed by the proceeds from the project or agency they are issued to finance.

Question 23

Preferred Stock

Answer 23

Nonvoting shares in a corporation, paying a fixed or variable stream of dividends.

Question 24

Price-earnings ratio

Answer 24

The ratio of a stock’s price to
its earnings per share. Also referred to as the P/E multiple.

Question 25

Price-Weighted average

Answer 25

Weighted average with weights proportional to security prices rather than total capitalization.

Question 26

Put Option

Answer 26

The right to sell an asset at a specified exercise price on or before a specified expiration date.

Question 27

Repurchase Agreements

Answer 27

Short-term, often over- night, sales of government securities with an agreement to repurchase the securities at a slightly higher price. A reverse repo is a purchase with an agreement to resell at a specified price on a future date.

Question 28

Residual Claim

Answer 28

Refers to the fact that shareholders are at the bottom of the list of claimants to assets of a corporation in the event of failure or bankruptcy.

Question 29

Treasury Bonds or Notes

Answer 29

Debt obligations of the federal government that make semiannual coupon payments and are issued at or near par value.

Question 30

Yield to maturity

Answer 30

A measure of the average rate of return that will be earned on a bond if held to maturity.