Ch. 3 - Securities

Question 1

annual coupon divided by the current bond price

Answer 1

current yield

Question 2

financial asset derived from an existing traded asset rather than issued by a business or gov’t to raise capital. Basically, any non-primary asset

Answer 2

Derivative Asset

Question 3

longer-term debt obligations, often corporations or gov’ts that promise to make fixed payments according to preset schedule (i.e., car loan), mature (come due) more than a year after issue

Answer 3

fixed-income securities

Question 4

an agreement made today regarding terms of a trade that will take place later, no $ due up front, obligated to buy or sell upon entry of the agreement

Answer 4

futures contract

Question 5

debt obligations of large corporations and gov’ts w/ an original maturity of 1 yr or less

Answer 5

money market instruments

Question 6

an agreement regarding a type of derivative in which the owner has the right, but not the obligation, to buy or sell a specific asset at a specified price by a specified date

Answer 6

option contract

Question 7

price paid to buy an option

Answer 7

option premium

Question 8

security originally sold by a business or gov’t to raise money
(interest-bearing or equity securities)

Answer 8

primary asset

Question 9

a type of derivative in which the owner has the right but not the obligation to sell an asset

Answer 9

put option

Question 10

the price specified in an option contract at which the underlying asset can be bought for a call option or sold (for a put option). Also called the striking price or exercise price.

Answer 10

strike price

Question 11

what type of security is most liquid?

Answer 11

money market instruments

Question 12

what’s the greatest risk with money market securities?

Answer 12

default

Question 13

what’s the safest, most-liquid money market security?

Answer 13

treasury bill (T-bill)

Question 14

the difference between the amount received for a money market security upon maturity and the price originally paid for the mm security is considered what?

Answer 14

the interest earned

Question 15

For bonds, the $ amount received as the annual set return of investment is known as?

Answer 15

annual coupon amount

Question 16

annual coupon amount ➗ current bond price =

Answer 16

current yield

Question 17

True or false; current yield varies b/c of the bond’s price fluctuations

Answer 17

True

Question 18

Fixed income securities advantages are?

Answer 18

1) lump sum payment at the end of maturity

2) as interest rates decrease, bond values increase

Question 19

typical final trading day for options

Answer 19

3rd friday of each month

Question 20

expiration day for options

Answer 20

saturday immediately following final trading day (3rd Friday of the month)

Question 21

european options can only be exercised on?

Answer 21

the day before the expiration date (aka, on the 3rd fri. of the month)

Question 22

who decides whether or not a company issues dividends to stockholders?

Answer 22

board of directors

Question 23

the board of directors of a publicly held company are installed into their positions how?

Answer 23

by vote of shareholders

Question 24

what is the simplest of all financial asset contracts?

Answer 24

futures

Question 25

what are the 2 types of future contracts?

Answer 25

1) financial

2) commodities

Question 26

true or false and why? most futures contracts don’t result in delivery

Answer 26

true b/c most are sold before they’re due

Question 27

type of derivative that gives the owner the right, but not obligation to buy an asset

Answer 27

Call Option

Question 28

what are the 2 distinguishing features of a money market instrument

Answer 28

1) all are debit (IOUs)

2) mature (come due) in less than 12 months

Question 29

Volume is quoted for stocks in round lots of

Answer 29

100

Question 30

volume is quoted for corporate bonds based on?

Answer 30

the actual number of bonds

Question 31

volume for options is reported in

Answer 31

contracts

Question 32

each option contract represents the right to buy/sell how many shares?

Answer 32

100

Question 33

the volume of futures is reported in

Answer 33

contracts

Question 34

each contract of a futures derivative represents what?

Answer 34

a fixed amount of the underlying asset

Question 35

how is money made or lost in future contracts?

Answer 35

based on the future price of an asset, NOT the current market price

Question 36

the difference between future and option contracts is that

Answer 36

1) being obligated to buy/sell once future contract official vs. not obligated but having the right to buy or sell in an option contract
2) not having to pay any money upfront for to buy/sell futures but have to pay option premium to enter into option contract

Question 37

The difference between a real vs. financial asset is?

Answer 37

tangible for real assets vs. intangible for financial. i.e., real = land, machinery; for financial = legal claim on a real asset

Question 38

what are the 2 types of types of financial assets

Answer 38

1) primary - direct claim on real asset

2) derivative: potential claim on a primary asset (futures and options)