Chapter 1 Flashcards
(48 cards)
What are REAL assets?
assets used to produce goods and services
What are FINANCIAL assets?
claims on real assets or the income generated by them
What is equity?
an ownership share in a corporation
What is fixed-income (debt) securities?
pay a specified cash flow over a specific period
for example a bond
what are Derivative securities?
securities providing payoffs that depend on the values of other assets
How is the material wealth of society determined?
the economy’s productive capacity, which is a function of the economy’s REAL ASSETS
Equityholders are ______ and can get _________
owners , dividends
What are Equityholders NOT promised?
any particular payment
The success of common stock investments depends on ……
the success of the firm and its real assets
Debt securities do not promise ….
a share in the profits of the issuing entity
Debt securities promise …
either a fixed stream of income or a stream of income that is determined according to a specific formula
Money market securities are characterized by:
- Maturity less than 1 year
- Safety of the principal investment
- Low rates of return
example: treasury bill
The value of a derivative security depends on ….
the value of another related security
What are examples of a derivative security?
an option (put or call) and a futures contract
What is an important use of derivatives?
to hedge risks or transfer them to other parties
What happens when the market is more optimistic about a firm?
the share price will increase
the company will need to issue fewer shares to raise funds that are needed
In a market economy, _______ _________ are primarily allocated by _________ _______
capital resources , financial markets
Who does the stock market encourage allocation of capital to?
the firms that appear AT THE TIME to have the best prospects
Market signal will help to allocate capital efficiently only if …
investors are acting on accurate information
In security markets, there should be ….
a risk-return trade-off
higher-risk assets have higher expected returns than lower-risk assets
Financial markets allow for _____ __________ through time from higher-income periods to lower
shift consumption
How do financial markets price securities?
according to their riskiness
An investor who is considering one of two investment that are identical in all respects except for risk, anticipates …
a fair return for the risk of the security she invests in, she can expect to pay less for the security that has a higher risk.
Commodity and derivative markets allow firms to ….
adjust their exposure to various business risks
