Chapter 2 Flashcards by Austin Timmons

What are the items below describing?

Money markets
Capital markets

Types of Financial Markets

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Short-term, marketable, liquid, low-risk debt securities

What are Money Markets?

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Longer term and riskier securities

Divided into 4 segments: longer-term bonds, equity, options, and futures

What are Capital Markets?

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Government issued debt sold to the public

What are Treasury Bills (T-Bills)?

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Price you pay to buy a t-bill from a securities dealer

What is Ask Price?

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Lower price you receive if you sell a t-bill to a dealer

What is Bid Price?

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Difference in ask price and bid price; dealer’s source of profit

What is Bid-Ask Spread?

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What are the items below describing?

Bank pays interest and principal to the depositor only at maturity
time deposit cannot be withdrawn on demand (without penalty)
Insured up to $250,000 by FDIC

Certificates of Deposit

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Short-term unsecured debt notes, often issued by large, well-known companies and backed by a bank line of credit. Maturity: Up to 270 days, typically 1 month or less.

What is Commercial Paper?

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An order to a bank by a customer to pay a sum of money at a future date

What is Bankers’ Acceptance?

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

What are Eurodollars?

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What are the items below describing?

Term repo
Reverse repo

Types of Repurchase Agreements

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Short-term, often overnight, sales of securities with an agreement to repurchase them at a slightly higher price

What are Repurchase Agreements?

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Term of the implicit loan can be 30 days or more

What is a Term Repo?

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Dealer buys government securities from investor, agreeing to sell them back on a future date

What is a Reverse Repo?

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What are the items below describing?

Funds in a bank’s reserve account at the Federal Reserve
Loans arranged at federal funds rate

Federal Funds

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What are the items below describing?

Was the premier European money market interest rate
Based on surveys of rates reported by participating banks not actual transactions

London Interbank Offer Rate (LIBOR)

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What are the items below describing?

Rate on overnight repurchase agreements collateralized by Treasury securities
Replaced LIBOR in the United States
Since well-collateralized, cleaner expression of time value of money resulted

Secured Overnight Financing Rate (SOFR)

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Mutual funds that invest in money market instruments.

Government funds hold short-term U.S. Treasury or agency securities
Prime funds also hold other money market instruments

What are Money Market Funds?

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What are the items below describing?

Treasury notes and bonds
Corporate bonds
Municipal bonds
Mortgage securities
Federal agency debt

The Bond Market

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Treasury Notes maturities range up to ______ years

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Treasury Bonds maturities range from _______ years

10 to 30

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What are the items below describing?

Government-issued bonds linked to a cost of living index
Provide citizens an effective hedge against inflation risk
In the United States, they are called TIPS

Inflation Protected Treasury Bonds

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Agencies formed to channel credit to a particular sector that Congress believes might not receive adequate credit through private sources

What is Federal Agency Debt?

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International capital market largely centered in London - Eurobond - Yankee bond

What are International Bonds?

Denominated in a currency other than that of the issuing country (i.e., Eurodollar, Euroyen).

What is a Eurobond?

Dollar-denominated bond sold in the United States by a non-U.S. issuer (Samurai bond, Bulldog bond)

What is a Yankee Bond?

Tax-exempt bonds issued by state and local governments. - General obligation -- backed by general taxing power of issuer - Revenue -- backed by proceeds from the project or agency they are issued to finance - Industrial development -- revenue bond issued to finance commercial enterprises

What is a Municipal Bond?

True or False? Taxable bond gives a higher return; otherwise, the municipal bond is preferred

True

True or False? Municipal bond gives a higher return; otherwise, the taxable bond is preferred

False

What are the items below describing? - Secured bonds - Unsecured bonds

Types of Corporate Bonds

Private firms borrow money directly from the public

What are Corporate Bonds?

Specific collateral backed

What are Secured Bonds?

Debenture

What are Unsecured Bonds?

Issuer has option to repurchase at call price

What is a Callable Corporate Bond?

Bondholder has option to convert bond to a prespecified number of shares of stock

What is a Convertible Corporate Bond?

Ownership claim in a pool of mortgages or an obligation that is secured by such a pool

What are Mortgage and Asset Backed Securities?

Loans must satisfy certain underwriting guidelines before they may be purchased by Fannie Mae or Freddie Mac

What are Conforming Mortgages?

Riskier loans made to financially weaker borrower

What are Subprime Mortgages?

What are the items below describing? - Represent ownership shares in a corporation - Each share entitles owner to one vote - Corporation controlled by board of directors elected by shareholders - Residual claim - Limited liability

Common Stock

Last in line of all who have a claim on the assets and income of the corporation

What is Residual Claim?

Shareholders can lose a maximum of their original investment in the event of corporate failure

What is Limited Liability?

What are the items below describing? - Dividend yield - Capital gains - Price - earnings ratio

Stock Market Listings

Annual dividend payment expressed as a percent of the stock price

What is Dividend Yield?

Amount by which the sale price of a security exceeds/falls short of the purhcase price

What are Capital Gains?

Ratio of a stock's price to its earnings per share

What is a Price - Earnings Ratio?

What are the items below describing? - Promises to pay a fixed amount of income each year in preference to the common stock (behaves as perpetuity) - Does not convey voting power - No contractual obligation to pay, but dividends owed accumulate - Payments are dividends rather than interest, not a tax-deductible expense for the firm - Other corporation that own domestic preferred stock may exclude 50% of dividends when computing taxable income

What is Preferred Stock?

What are the items below describing? - Certificates traded in U.S. markets that represent ownership in shares of a foreign company - Each ADR may correspond to ownership of a faction of a foreign share, one share, or several shares of the foreign corporation

Depository Receipts

What are the items below describing? - Includes 30 large blue-chip corporations - Computed since 1896 - Price wighted average

Dow Jones Industrial Average

What are the items below describing? - More broad based index of 500 largest domestic firms - Market value weighted - Index Fund and Exchange Traded Funds

Standard & Poor's 500

What are the items below describing? - Russell Indexes: Market segment specific - NYSE, NASDAQ, Wilshire 5000, CRSP

U.S. Market-Value Indexes

Do not correspond to buy-and-hold strategies

What are Equally Weighted Indexes?

Nikkei, TSE, DAZ, Hang Seng, TSX

What are Foreign and International Stock Market Indexes?

A claim that's value is directly dependent on the value of an underlying asset or assets - AKA: contingent claims - Options - Futures/Forwards - Swaps

What is a Derivative Asset?

Gives holder the right to purchase an asset for a specified price, called the exercise or strike price, on or before a specified expiration date

What is a Call Option?

Gives holder the right to sell an asset for a specified exercise price on or before a specified expiration date

What is a Put Option?

Calls for delivery of an asset (or cash value) at a specified delivery or maturity date for an agreed-upon price to be paid at contract maturity - Long position - Short position

What are Futures Contracts?

Held by the trader who commits to purchasing the asset on the delivery date

What is a Long Position Futures Contract?

Held by trader who commits to delivering the asset at contract maturity

What is a Short Position Futures Contract?

What are the items below describing? - Right, but not obligation, to buy or sell - Exercised only when it is profitable - Must be purchased at a premium

Options

What are the items below describing? - Obliged to make or take delivery - Long (short) position must buy (sell) at the price - Contracts are entered into without cost

Futures Contract

Chapter 2 Flashcards

(61 cards)