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FI 356 Midterm Flashcards

(73 cards)

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1
Q

what is a security

A

(anything that is a financial instrument) it is a claim on the issuers future income or asset

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2
Q

what is a bond

A

debt security that promises to make payments periodically with a maturity (can be fixed or floating

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3
Q

What is a floating payment

A

interest rate that changes Time to time made on a benchmark

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4
Q

what is interest rate

A

cost of borrowing or price paid for the rental of funds%

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5
Q

what is the purpose of debt markets

A

enable corporations and governments to borrow, it is where interest rates are determined

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6
Q

what do stock prices effect

A

people willingness to spend and business investing decisions

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7
Q

types of stocks

A

common stock

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8
Q

what is the foreign exchange market for

A

conversion of currency
instrument for movie funds between countries
where foreign exchange rates are determikned

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9
Q

what does a change in the exchange rate effect

A

cost of imports and exports

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10
Q

how does investing in foreign country work

A

you buy the dollars to get US stock but then have a risk of exchange rated or bad company performance

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11
Q

financial institutions purpose

A

create relationship to get money from lender to borrower

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12
Q

What is monetary policy about and what monetary policy decisions affect?

A

Monetary policy involves managing the money supply and interest rates, impacting inflation, employment, and economic stability

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13
Q

we know that high inflation means rising cost hinders people tp spend and borrow but but about negative inflation

A

the price just keeps on getting lower and lower that individuals will wait to consume till later knowing that what they invest in today will cost less

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14
Q

is the target inflation rate

A

2% as it supports growth and not negative

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15
Q

what is the function of the financial system

A
  • produces efficiency allocation of capital
    -allows consumers to time out purchases better
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16
Q

What are primary markets

A

where new issues of a security are sold (important for company needing to raise funds) done by investment banks

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17
Q

What are the main functions of the financial system? What is the difference between direct and indirect finance?

A

The financial system allocates resources, provides liquidity, and manages risk. Direct finance involves borrowing directly from markets, while indirect finance uses intermediaries like banks

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18
Q

what is purpose of secondary market

A

where securities are being resold to creat liquidity and determine price: made of Brokers, dealers

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19
Q

what do brokers do

A

match buyers to sellers

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20
Q

what do dealers do

A

link buyers and sellers by buying and selling securities

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21
Q

where can secondary markets be organized

A

at one location (exchanges)
dealers with different locations with their own inventory of securities (Over The Counter)

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22
Q

characteristics of money market

A

short ltermdebt instruments:
- more liquid
-smaller fluctuations in prices
-corporationa and banks use to earn interest on surplus funds

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23
Q

characteristics of capital market

A

long term and equity instruments
- less liquid
-greater fluctuations
-often used by financial institutions

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24
Q

what is financial intermediation

A

used for indirect finance with financial insitutions as they understand transaction costs
risk sharing
and information costs

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25
what costs do financial intermediaries mitigate
info gathering costs legal and documents risk monitering collection costs
26
asymmetric information
lack of info before or after transaction
27
adverse selection
(before transaction) not knowing what kind of deal you are going to make due to a % of safe and unsafe deals and not having information to choose(car market)
28
moral hazard
after transaction - borrower engages in undesirable activitiesa
29
what is another way that financial institutions lower costs
economies of scope
30
how is financing mostly done in us
Bank loans
31
basic facts of business financing
Businesses primarily run on indirect finance (bank loans) as securities are less accessible
32
why is indirect finance more important than direct finance for business?
because indirect finance can assess a borrowers efficiency
33
ow can adverse selection be mitigated
transparency and audit requirements
34
what is YtoM
the total return anticipated on a bond or other fixed-interest security if it is held till it matures used as a metric to compare potential returns
35
how to calculate present value of each year
Cash flow/(1+YtM)^t
36
what is a simple loan
repaid to the lender at maturity date along with an additional payment for the interest
37
what is a fixed payment loan
repaid by making same payment every period (principle+intrest)w
38
What is a Coupon Bond
Fixed interest payment (coupon) every year until the maturity date, when a specified final amount is repaid
39
what is a discount bond (zero coupon bond)
bought at a price below face value it does not make any interest and face value is repaid at maturity date
40
how to calculate yield price for a year
swap around the present value formula to get I i = (Cash flow/PV)-1
41
what is coupon bond=face value
YtoM=coupon rate
41
How do you calculate price of a perpetual bond with no maturity
p=yearly payment/ yield to maturity for perpetuity)
42
Real vs nominal interest rate
real is adjusted by subtractive expected changes in inflation
43
Fisher equation
i(r)=i-Pie^e
44
rate of return
payments to the owner + change in value expressed as a fraction of the purchase price
45
how to calculate rate of return
(Cash flow+selling price difference from original price)/FV
46
current yield
coupon payment/purchase price
47
what is the rate of capital gain
the change in price over the purchasing price
48
reinvestment risk
when you re-invest receives into new bonds (selling current bond to buy another) you can only win if rates go up
49
what is duration
average. lifetime of a debt securities stream of payments
50
what is the duration of a zero coupon bond
=the bonds maturity
51
what happens to duration at coupon rate increases
duration decreases and bonds with a larger coupon rate are less risky
52
what happens to duration as interest rates increase and why
duration decreases because low interest rates increasing and coupon rate also is the same there is 100% return
53
how to calculate % change in P
-Duration x (change i/1+i)
54
relationship of duration, interest rate, and risk
Duration increases causes change in price to increase which increases risk
55
what are the determinants of asset demand
wealth expected return risk liquidity
56
what makes a asset liquid
the markets depths(# of orders) and breadth(orders are numerous and in large volume)
57
Shifts in supply curve
expected profitability of investmens expected inflation government budget
58
what is risk premium
the additional return investors require to compensate for the risk of default on a bond
59
what if risk increases on corporate bonds
since government bonds have less risk and are risk free the demand will shift towards government bonds
60
what is the role of rating agencies
assess creditworthiness of debt issuers and assign ratings that help investors gauge
61
how are rating agencies operating
rate either by investment grade(low risk) or speculative (high risk of default)
62
what is liquidity premium
the extra yield demanded by investors for holding a bond that is less liquid meaning it cannot be easily sold without ignifican loss in value, less liquid bonds must offer a higher return to compensate investors
63
how does taxation affect the level of interest rates
bond with less taxes have lower yields
64
what does upward sloping yield curve mean
Long term interest rates are higher than short term--> expectations of rising future interest rates for economic growth
65
what is the meaning of a flat yield curve
short term and long term rates are equal meaning little expected change in future interest rates
66
What is the meaning of downward sloping yield curve
short term interest rates are higher than long term suggesting market expects future economic slow down or recession
67
what are the facts about about yield curves
1. interest rates on bonds w/ diff maturities move together 2. yield curve slope up when short term interest rates are low and downward when they are high 3. they are typically upward sloping
68
what is the expectation theory
long term rates are averages of expected future short term rates
69
what is the market segmentation theory
bonds of different maturities are not substitutes due to the investor typesw
70
what two theories is in the liquidity premium theory
expectation and market segmentation theory
71
what is liquidity premium theory
investors demand a premium for holding longer term bonds which are more sensitive to interest rates
72

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