Lecture 4

Question 1

Holders of equity securities are entitled to

Answer 1

• the earnings of the corporation when those earnings are distributed as
  dividends
• a pro rata share of the remaining equity in case of liquidation

Question 2

market
capitalization

Answer 2

The total value of a corporation’s common stock

Question 3

Stocks are riskier than bonds

Answer 3

• stockholders have lower priority than bondholders when a firm goes into
  liquidation
• dividends are less assured
• stock price increases are not guaranteed

Question 4

• A stock investor can earn a return:

Answer 4

• stock price appreciation
• dividends paid to stockholder

Question 5

Dividends:

Answer 5

• are distributions made by a corporation to its owners
• most often cash dividends but can also be stock dividend (i.e. provide
  shareholders with additional share)
• dividends paid on common stock are not a legal obligation of a
  corporation
• but changes in dividends trigger a market reaction
• it is observed that corporations are reluctant to decrease or eliminate
  dividends

Question 6

Hedging risk

Answer 6

Hedging risk involves engaging in a financial transaction that offsets a long position
by taking an additional short position, or offsets a short position by taking an
additional long position

Question 7

Forward contract

Answer 7

An agreement to buy or sell an asset at a certain future time for a
certain price

Question 8

Option

Answer 8

A contract giving the option holder the right to buy or sell an asset at a
certain future time for a certain price

Question 9

Futures contracts

Answer 9

similar to forward contracts, but they have standardized features to
make them tradable in securities exchanges.

Question 10

call option

Answer 10

A call option is the right to buy an underlying asset

Question 11

put option

Answer 11

A put option is the right to sell