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CPCU 540 > Chapter 7 > Flashcards

Chapter 7 Flashcards

0
Q

What determines the cost of long term financing?

A

Capital market

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1
Q

Market where short term securities are traded.

A

Money market

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2
Q

Market where new securities are sold

A

Primary market

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3
Q

Primary market where participants find their own trading partners .

A

Direct search

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4
Q

Primary market where participants use agents to find partners

A

Broker

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5
Q

Primary market where participants trad weigh dealers who are buyers and sellers

A

Dealer

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6
Q

Primary market where participants compete against other investors through an intermediary

A

Auction

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7
Q

Markets where previously-issued securities are purchased and sold

A

Secondary market

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8
Q

What must a secondary market have to provide liquidity?

A

Depth and breadth

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9
Q

Ability to handle large volume of securities without a large effect on prices.

A

Depth

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10
Q

Analyzes the number of companies advancing relative to the number declining.

A

Breadth

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11
Q

Federal government bonds are/are not subject to state tax

A

Are not

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12
Q

Government bond that matures in a year or less. They are issued at a discount and mature at par.

A

Treasury bills

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13
Q

Government bond that mature between 1 and 10 years and pay interest semi-annually.

A

Treasury notes

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14
Q

Government bond that matures in 30 years and pays interest semi-annually.

A

Treasury bonds

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15
Q

Government bond where the coupon rate is a fixed percentage of the principle and the par value of the bond is adjusted by CPI.

A

Treasury Inflation Protected Securities

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16
Q

Why do municipal bonds usually have lower interest?

A

Because interest income is tax-exempt

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17
Q

Municipal bond backed by revenues from a designated project

A

Revenue bond

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18
Q

Municipal bond backed by the taxes collected by the government body.

A

General obligation bond

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19
Q

Long-term debt offered outside issuers country. They have a 3-7 year maturity and typically are usually unsecured and lay interest annually.

A

Eurobond

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20
Q

Similar to Eurobonds but more regulated

A

Foreign bonds

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21
Q

The bond contract which lists the principal and maturity date, coupon rate and rights/duties of buyer and seller.

A

Indenture agreement

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22
Q

Bond thy can be converted to common stock at a fixed price in the future

A

Convertible bonds

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23
Q

Bond that could be paid off by the issuer before the maturity date. May have higher initial interest rates.

A

Callable bonds

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24
Q

A bond guaranteed by an entity other than the issuer.

A

Guaranteed bond

25
Q

A bond where portions of principal mature on different dates

A

Serial bond

26
Q

A bond where interest is tied to the issuer’s financial results

A

Participating bond

27
Q

A bond with adjusting interest rates

A

Floating-rate bond

28
Q

A bond where money is set aside each year to repay principal

A

Sinking fund

29
Q

Bond backed by collateral

A

Secured bond

30
Q

Unsecured bond. These have highest risk to holder.

A

Debenture

31
Q

What do PC insurers usually purchase?

A

Asset-backed securities (auto loans, credit cards, etc)

Mortgage-backed securities

32
Q

A bond’s yield to maturity is also know as its _____ ____

A

Discount rate

33
Q

Which factors affect yield to maturity?

A

Real rate of return
Inflation premium
Risk premium

34
Q

Tia compensates bond holder for credit risk and liquidity risk

A

Risk premium

35
Q

Shorter maturity bonds have a greater/lower rate of return?

A

Lower

36
Q

Type of stock where there are no voting rights and past unpaid dividends must be paid before dividends are paid on common stock

A

Cumulative preferred stock exchange

37
Q

What is the benefit to having preferred stock vs. common?

A

Liquidator rights prior to common shareholders. Some have redemption value and some can be convertible.

38
Q

What does economic stock theory suggest?

A

Stock prices are a result of supply and demand. Investors think price moves due to economy.

39
Q

What does financial volatility theory suggest?

A

Stock price is the discounted present value of future dividends. I’m

40
Q

This type of analysis involves analysis of financial data and macroeconomics to determine stock price. It looks to see it the following factors exceed s&p average: expected earnings growth, stability of sales, dividend payout, leverage, institutional ownership of stock.

A

Fundamental analysis

41
Q

This hypothesis contends that the mark this efficient at pricing securities and that individual investors can’t really beat the market. There is no point looking for undervalued stock.

A

Efficient market hypothesis

42
Q

What are the two components of return?

A

Income generated by the investment (yield)

Capital gain or loss on the disposition

43
Q

What is the annual rate of return.

A

Sum of yield and capital gain or loss expressed in percentage terms.

44
Q

What is the formula for annual return rate of a bond?

A

(Interest + Capital Gain) / beginning price

45
Q

What is the formula for annual rate of return of a stock?

A

(Dividend + Capital Gain) / beginning price

46
Q

Under FASB what does fair value equal?

A

The asset’s exit price.

47
Q

What is the purpose of amortization of the value of a bond?

A

To stabilize value over time.

48
Q

What does SFAS 115 do?

A

Provide guidance on reporting of assets held as investments.

49
Q

How does an impairment affect financial reporting? GAAP

A

Results in a reduction of shareholders equity (or surplus)

50
Q

How are bonds held to maturity valued on the balance sheet?GAAP

A

Amortized cost

51
Q

How are investments available for sale valued on the balance sheet? GAAP

A

Fair value

52
Q

How are trading securities valued on the balance sheet? GAAP

A

Fair value

53
Q

How are unrealized gains in bonds held to maturity treated? GAAP

A

Disclosed in notes

54
Q

How are unrealized gains in securities available for sale treated? GAAP

A

Reported as comprehensive income

55
Q

How are unrealized gains in trading securities treated? GAAP

A

Included in income

56
Q

How are the highest quality bonds reported on the SAP annual statement?

A

Amortized cost

57
Q

How are the low quality bonds reported on the SAP annual statement?

A

Lower of amortized cost or fair value

58
Q

How are stocks reported on the SAP annual statement?

A

Fair value

59
Q

How are unrealized gains or losses reported on the SAP annual statement?

A

Adjustment to capital and surplus account

60
Q

Who determines the quality of bonds under SAP?

A

Securities Valuation Office

CPCU 540 (11 decks)

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