Efficient Market Hypothesis
The argument that stocks are always priced about right
Savers
Households and businesses comprise the largest segment of this population
Portfolio diversification
Practice of holding a large number of different stocks to reduce risk
Securities exchange seat
Membership that is purchased to allow race in an equities market
Organized exchanges
Places where buys and sellers meet to trade securities
Over-the-counter market
An electronic marketplace
Futures market
A place in which contracts for grain and livestock agreements are made in advance
Option markets
Place in which a put or call can be purchased
Financial system
The network that connects savers and borrowers
Financial assets
A claim on the property and/or income of a borrower
Borrowers
Government and businesses represent the larger portion of this population
REIT’s
Company that makes loans to construction companies that’s build homes
Financial intermediaries
Institutions that help being surplus funds of savers to borrowers
Pensions
A payment received by somebody to provide income security after retirement
Dow jones
Index that measures the performance of 30 stocks on the NYSE
S&P
An index that measures the value of stocks on the NYSE, AMX, and OTC
Bull market
A market in which the prices are constantly moving up
Bear market
A situation in which the market prices have been moving down constantly
Put
The right to sell a share of stock at a specific price at some time in the near future
Call
The right to buy a share of stock at a specified price some time in the future
Bond A: 7%, 10 year, $1,000 @ $1,050
Par value
$1,000
Bond A: 7%, 10 year, $1,000 @ $1,050
Coupon
7%
Bond A: 7%, 10 year, $1,000 @ $1,050
Maturity
10 years
Bond A: 7%, 10 year, $1,000 @ $1,050
Coupon payment
Coupon payment=coupon(payment)
$70
Bond A: 7%, 10 year, $1,000 @ $1,050
Current yield
Current yield=coupon payment/purchase price
6.67%
T-bill a: 52 weeks, $20,000 @ $19,350
T-bill b: 26 weeks, $10,000 @ $9,600
T-bill c: 13 weeks, $30,000 @ $29,750
Discount of t-bill C?
$250
T-bill a: 52 weeks, $20,000 @ $19,350
T-bill b: 26 weeks, $10,000 @ $9,600
T-bill c: 13 weeks, $30,000 @ $29,750
Discount of T-bill A?
$650
T-bill a: 52 weeks, $20,000 @ $19,350
T-bill b: 26 weeks, $10,000 @ $9,600
T-bill c: 13 weeks, $30,000 @ $29,750
APR of T-bill B??
APR= discount/purchase pride x 1,2,4
(400/9600)x2= 8.33%
T-bill a: 52 weeks, $20,000 @ $19,350
T-bill b: 26 weeks, $10,000 @ $9,600
T-bill c: 13 weeks, $30,000 @ $29,750
APR of T-bill A??
APR= discount/purchase pride x 1,2,4
(650/19,350)x1 = 3,36%
T-bill a: 52 weeks, $20,000 @ $19,350
T-bill b: 26 weeks, $10,000 @ $9,600
T-bill c: 13 weeks, $30,000 @ $29,750
Maturity of T-bill C??
13 weeks
List one investment commonly used to save for retirement
401 k plan
IRA
Pension
Junk bonds
A bond that is rated lower than BBB, because of the rusty nature of the investment
3 main components of a bond
Maturity, coupon, par value
Types of non-banking financial intermediaries
Life insurance
Mutual fund
REIT
Premium
An amount of money to be paid for insurance