Chapter 2 Asset Classes and Financial Instruments

Question 1

What is a Treasury Bill?

Answer 1

a short-term government debt security issued at a discount from face value and returning the face amount at maturity

Question 2

asked yield equation

Answer 2

(face value - asked price) / asked price * 365 / n

Question 3

What is a Commercial Paper?

Answer 3

Short-term unsecured debt issued by large corporations.

Question 4

What is a Certificate of Deposit（定期存單）?

Answer 4

A certificate issued by depository institutions for a time deposit.

Question 5

What is a Bankers’ Acceptance（銀行承兌匯票）?

Answer 5

An order sent by a customer to pay a sum of money on a future date.

Question 6

What is a Eurodollar?

Answer 6

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

Question 7

What are some characteristics of the Eurodollar?

Answer 7

1. No federal funds required
2. higher interest rate than US deposits
3. Eurodollar CDs are less liquid than domestic CDs

Question 8

What is the LIBOR rate?

Answer 8

The lending rate among large banks in the London market.

Question 9

What is a Repurchase Agreement?

Answer 9

It’s a short-term sale of securities with an agreement to repurchase the securities at a higher price.

Question 10

What is a Brokers’ Call?

Answer 10

Investors who buy stocks on margin borrow part of funds to pay from their broker, who in turn borrow the funds from a bank, and agree to repay the bank immediately if the bank requests it.

Question 11

What are Federal Funds?

Answer 11

Funds in the accounts of commercial banks at the Federal Reserve Bank.

Question 12

How does the Federal Open Market Committee control the federal funds rate?

Answer 12

They sell and buy treasury bonds to control the federal funds rate.

Question 13

What is the difference between money market and bond market instruments?

Answer 13

Bond market instruments are longer-term than those traded in the money market.

Question 14

Are bond and money market instruments fixed or floating income?

Answer 14

Traditionally fixed income.

Question 15

What is a Inflation-Protected Treasury Bond?

Answer 15

The face values on these bonds are adjusted in proportion to the Consumer Price Index.

Question 16

What is a Federal Agency Debt?

Answer 16

Federal agencies channel credit through these debt instruments to a particular section of the economy (ex. Mortgage)

Question 17

What is a Municipal Bond?

Answer 17

Tax-exempt bonds issued by state and local governments.

Question 18

What is a Mortgage-Backed Security(MBS)?

Answer 18

An MBS is the security generated from the securitization process, which represents the ownership of a pool of mortgage loans.

Question 19

What are some characteristics of equity share?

Answer 19

1. Represents the ownership in a corporation.
2. Has residual claim.
3. Has limited liability.

Question 20

What are some characteristics of preferred stock?

Answer 20

1. No voting rights.
2. Are usually cumulative
3. Priority of the claim over the firm’s income and asset (debt > preferred > common)

Question 21

What is a Depository Receipt?

Answer 21

A depository receipt is a certificate traded in US markets that represent ownership in shares of a foreign company.

Question 22

What are some advantages of an American Depository Receipt?

Answer 22

1. Easier for foreign firms to satisfy US security registration requirements.
2. Provides a way for foreign firms to raise money in the US.
3. Provides the most convenient way for US investors to invest in and trade the shares of foreign corporations.

Question 23

Please name some stock market indexes.

Answer 23

Dow Jones Industrial Average
NASDAQ Composite Index
NYSE Composite Index
Wilshire 5000 Index

Question 24

What are the functions of stock indexes?

Answer 24

1. Track average returns of a portfolio
2. Measure the performance of the economy
3. Acts as an underlying asset of derivatives

Question 25

How is the stock index weighted?

Answer 25

1. Price weighted (DJIA) 2. Market value weighted 3. Equally weighted

Question 26

Explain the DJIA Price-Weighted Average.

Answer 26

算出各股票的Percentage change in index = (change in total value) / initial total value Σ 各股票% * 權重（期初該股票一股價格 / 期初所有股票一股價格總額）

Question 27

Explain the S&P's 500 Composite Market Value-Weighted Index.

Answer 27

算出各股票的Percentage change in index = (change in total value) / initial total value Σ 各股票% * 權重（期初該股票流通在外股票總額 / 期初所有股票流通在外股票總額）

Question 28

Explain the Value Line Equally Weighted Index.

Answer 28

算出各股票的Percentage change in index = (change in total value) / initial total value Σ 各股票% * 1/n

Question 29

What features of money market securities distinguish them from other fixed-income securities?

Answer 29

Money market securities are short-term, relatively low risk, and highly liquid. Also, their unit value almost never changes.

Question 30

What are the major components of the money market?

Answer 30

Treasury bills, certificates of deposit, commercial paper, bankers’ acceptances, Eurodollars, repos and reverses, federal funds, and brokers’ calls.

Question 31

Why are high-tax-bracket investors more inclined to invest in municipal bonds than are low-bracket investors?

Answer 31

The coupons paid by municipal bonds are exempt from federal income tax and from state tax in many states. Therefore, the higher the tax bracket that the investor is in, the more valuable the tax-exempt feature to the investor.

Question 32

What is a Treasury note or bond

Answer 32

Debt obligation of the federal government with original maturities of one year or more.

Question 33

What are Corporate Bonds?

Answer 33

Long-term debt issued by private corporations typically paying semiannual coupons and returning the face value of the bond at maturity.

Question 34

What are common stocks?

Answer 34

Ownership shares in a publicly held corporation. Shareholders have voting rights and may receive dividends.

Question 35

What are preferred stocks?

Answer 35

Nonvoting shares in a corporation, usually paying a fixed stream of dividends.

Question 36

What are derivative assets?

Answer 36

Securities with a payoff that depends on the prices of other securities.

Question 37

What is a call option?

Answer 37

The right to buy an asset at a specified exercise price on or before a specified expiration date.

Question 38

What is a put option?

Answer 38

The right to sell an asset at a specified exercise price on or before a specified expiration date.

Question 39

What is a future contract?

Answer 39

Obliges traders to purchase or sell an asset at an agreed-upon price at a specified future date.

Question 40

Equivalent taxable yield for municipal bonds.

Answer 40

coupon% / (1 - tax%)