Lecture 2

Question 1

What are the 5 major financial markets

Answer 1

Money Markets, Bond Markets, Mortgage Markets, Equity Markets, Derivative Markets

Question 2

What is the bank discount yield formula

Answer 2

Yd= (par-price)/par * 360/days to maturity * 100

Question 3

What is the bond equivalent yield formula

Answer 3

yd=(par-price)/par * 365/days to maturity *100

Question 4

What is the Repo agreement formula

Answer 4

Yrepo= (price of repo-sales price of security) / sale price of security * 360/days to maturity

Question 5

Describe money markets

Answer 5

Standardised securities with good liquidy, low default risk, short-term tenure (<120)

Question 6

What is Commercial paper in money markets

Answer 6

Unsercured corporate debt, mturities 1 to 270 days, issued by high quality borrowers

Question 7

Bond Market purpose

Answer 7

TO bring together long term borrowers and investors

Question 8

What are the type of bond indenture

Answer 8

Collateral, claim on assets, selected provisions, convertable bonds

Question 9

Major investers in corporate bonds

Answer 9

Pension funds , insurance firms, foreign investors

Question 10

Junk bonds

Answer 10

High yield non investment grade bonds. Higher risk of default

Question 11

Securization

Answer 11

Packing loans and selling claims to future cash flows of the loans

Question 12

What type of bonds are issued in the financial market of a nation by growing companies in that country

Answer 12

Foreign bonds

Question 13

Give an example of a foreign bond

Answer 13

Yankee bonds (swiss that issued in america) samurai bonds (firms that issue in bonds in japan)

Question 14

Describe mortage markets

Answer 14

THey are secured by the pledge of real property
They have a weak secondary market
They are highly regulated and supported by federal poliies

Question 15

Fixed Rate Mortgages

Answer 15

The note is the borrowing agreement
Payments amortized over time
Intrest is computed on the declining balance

Question 16

Adjustable Rate Mortage

Answer 16

Borrowers cost vary with intrest rate levels and inflation
Lenders shift intrest rate risk to the borrower
Payment caps exsit on them of the maxium in could go up in a year or over the life of the loan

Question 17

Mortages Backed Securities

Answer 17

One way to develop a secondary market for mortages
Th

Question 19

Describe common stock

Answer 19

Owenership in a corporations
One vote per share
Get value from dividens or appreciation of stock

Question 20

Prefered stock

Answer 20

Prior claim on earnings compared to common stock
THey get dividends first

Question 21

Convertible securities

Answer 21

Convertabel preffered stock vs Convertable bonds

Question 22

Primary market securities

Answer 22

Primary security sales happens when a company sells a mew stock/bonds dirctly to investors for the first time to raise money (eg. IPO)

Question 23

Secondary security sales

Answer 23

Investors who bought the stocks will sell them in the market like a stock exchange

Question 24

Underwritten vs best effots

Answer 24

Firm commitment on proceeds to issing firm vs No firm commitment

Question 25

Negotiated vs competitve bid

Answer 25

Issuing firm negotiates tems with investment banker vs issuer structres the offering and secures bids

Question 26

Explain American/global Depository Recipts

Answer 26

Allow investors to diversify portfolio globally by reducing both transaction costs and risk

Question 27

What are derivative used for

Answer 27

Derive their value from the changes in value of other assets value or events. Risk Managment tool. They are speculatory in nature

Question 28

Options

Answer 28

Rigth to buy or sell an underlying asset on or before a specific date at a strike price

Question 29

What does in the money indicate for an option

Answer 29

WHen it is excersices it will be profitable

Question 30

Swaps

Answer 30

Agreements to exchange series of payment obligations

Question 31

What were the 3 Reponses to the financial crisis

Answer 31

Stimulus check of 1 trillion, Basel III, increase capital ratios

Question 32

Does gouverment stimulus and support cause inflation or deflation

Answer 32

Inflation

Question 33

3 Characteristics of money markets

Answer 33

High marketibility, short term tenue, low default risk

Question 34

Sinking fund

Answer 34

Provisions require the issuer to retire a persentage of a bond on an annual basis. Reduces Defailt Risk

Question 35

Collable Securities

Answer 35

Can beretired prior to their state maturity at a pre specified price (call price)

Question 37

Asset Backed Securities

Answer 37

Financial calims issued when loans are securities

Question 38

Private Placement

Answer 38

Sale of bonds to a small group of sophisicated investors

Question 39

5 major differences between common stock and preffered stock

Answer 39

Agreed retirement Preffered dont vote

Question 40

What is a forward

Answer 40

Forward market is untrusted, trade OTC, unstandardized/tailred to the needs of the counterparties Numerous Deals match individual buyers/sellers Highly Illiquid because of cusomized features

Question 41

Futures

Answer 41

Transaction are conducted on an organized exchanged Margins requirements are imposed to ensure no one will default when prices move adversly Very few contracts are settled by delivery Very liquid low default risk All elements are standardized (price is the only variable)