Chap 1

Question 1

Real asset

Answer 1

assets used to produce goods/services; utimately determine the productivity capacity

Question 2

Financial asset

Answer 2

incomes generated by real asset; not contribute to the productive capacity

Question 3

securities

Answer 3

financial assets of individuals; liabilities of issuer to pay interest and principal

Question 4

3 types of financial assets

Answer 4

debt, equity and derivatives

Question 5

debt securities (fixed income)

Answer 5

pay specific cash flows over specific period;
coming in a variety of maturities (Money market - short term; capital market - long term)
coming in variety of risk

Question 6

proxy contest

Answer 6

shareholders seek to obtain enough proxies to take control of the company and vote for new board

Question 7

activist investors

Answer 7

large investor

Question 8

company raises fund

Answer 8

sells both stocks and bonds to the public
optimistic investor buy share
conservative investors buy bonds

Question 9

Investment portfolio

Answer 9

collection of investment assets

Question 10

asset classes

Answer 10

Categories of investment assets

Question 11

asset allocation

Answer 11

allocate asset classes in a portfolio

Question 12

security selection

Answer 12

choice of which securities to hold within each asset class

Question 13

top-down portfolio construction

Answer 13

start with asset allocation: decide portion for stocks and bonds in portfolio and ramification for both risk and return the portfolio could have
then valuing particular securities

Question 14

bottom up construction

Answer 14

starting with securities that seem to be attractive, without concern much about allocation

Question 15

Players in financial market

Answer 15

Firms: net demanders of capital to pay for investment in plans and equipments
Households: net supplier (by purchasing securities issued by firms)
Governments: both lender and borrower (depends on budget surplus/deficit)

Question 16

financial intermediaries

Answer 16

connect borrowers and lenders

Question 17

investment companies

Answer 17

firms managing funds for investors
Mutual funds: large scale trading and portfolio management
Hedge funds: pools and invest money of many investors (only for institutional)

Question 18

Investment banker

Answer 18

advisory role on prices and interest rate

Question 19

Venture capital

Answer 19

money invested to finance a new firm

Question 20

Private equity

Answer 20

investment companies whose shares are not traded in public stock markets

Question 21

LIBOR rate

Answer 21

rate bank borrows

Question 22

T-bill rate

Answer 22

US government borrowing rate

Question 23

securitization

Answer 23

pooling loans into a standardized securities backed by those loans

Question 24

underwater

Answer 24

house worth less than the loan balance

Question 25

equity (common stock)

Answer 25

ownership share of corporation holders are not promised any particular payment except dividends the firm may pay performance are tied to success of the firm -> riskier

Question 26

derivatives

Answer 26

securities providing payoffs depending on the success of other assets integral part of investment environment used to hedge; take highly speculative positions

Question 27

proxy contest

Answer 27

shareholders seek to obtain enough proxies -> take control of the firm and vote for new board

Question 28

activist investor

Answer 28

large investor