Quiz2 Flashcards
(34 cards)
Real asset
a. Used to produce goods and services
b. Example: Property, plants and equipment, goods, materials, etc.
Financial asset
a. Claims on real assets or claims on income deriving from real assets
b. Example: stocks, bonds,
Fixed income security
a. Promise either a fixed stream of income or a stream of income that is determined according to a specified formula.
b. Example: Corporate bonds
Equity
a. An ownership share of a corporation
b. Tied to success of the company
c. No promised payment, but company may issue dividends
Derivative security
a. Securities providing payoffs that depend on the values of other assets
b. Example: price of an option will depend on the stock price
Glass-Steagall Act
a. Prohibited banks from both accepting deposits and underwriting securities
b. Separation of investment and commercial banks
Risk allocation
a. Chance of repayment of the initial investment
b. Bonds have a low risk because they pay back what is agreed, whereas, stockholders will have more risk, but more potential to reap higher rewards.
Proxy fight
a. Majority of shareholders vote against the current board.
b. Example: Yahoo and Microsoft when Carl Icahn’s purchased 59 million shares and got 10 other large shareholders to vote against the current board. He was unsuccessful.
Active management
a. Attempting to identify mispriced securities or to forecast broad market trends
Passive management
a. Buying and holding a diversified portfolio without attempting to identify mispriced securities
Insurance company
An insurer, or insurance carrier, is a company selling the insurance; the insured, or policyholder, is the person or entity buying the insurance policy.
Hedge fund
a. Financial intermediary
b. Pool and invest the money of many clients
c. Only open to institutional investors such as pension funds, endowment funds, or wealthy individuals
Pension fund
A fund established by an employer to facilitate and organize the investment of employees’ retirement funds contributed by the employer and employees. The pension fund is a common asset pool meant to generate stable growth over the long term, and provide pensions for employees when they reach the end of their working years and commence retirement.
Investment bank
a. Firms specializing in the sale of new securities to the public (primary market transactions), typically by underwriting the issue
b. A financial intermediary that performs a variety of services. Investment banks specialize in large and complex financial transactions such as underwriting, acting as an intermediary between a securities issuer and the investing public, facilitating mergers and other corporate reorganizations, and acting as a broker and/or financial adviser for institutional clients. Major investment banks include Barclays, BofA Merrill Lynch, Warburgs, Goldman Sachs, Deutsche Bank, JP Morgan, Morgan Stanley, Salomon Brothers, UBS, Credit Suisse, Citibank and Lazard. Some investment banks specialize in particular industry sectors. Many investment banks also have retail operations that serve small, individual customers.
Exchange Traded Fund
a. A security that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange. ETFs experience price changes throughout the day as they are bought and sold
Primary market
a. A market in which new issues of securities are offered to the public
Secondary market
a. Previously issued securities are traded among investors
Venture capital
a. Money invested to finance a new firm
Private equity
a. Investments in companies that are not traded on the stock exchange
CDO
a. Collateralized debt obligations
b. Designed to concentrate the credit risk of a bundle of loans on one class of investors, leaving other investors in the pool relatively protected from risk
c. Prioritize claims between senior and junior tranches – meaning senior would get paid as long as a certain default rate was maintained before junior
CDS
a. Credit default swap
b. An insurance contract against the default of one or more borrowers.
c. Purchaser pays a premium for the protection of credit risks
Dodd-Frank
a. Stricter rules for bank capital, liquidity, and risk management practices, especially banks become larger and their potential failure would be more threatening.
b. Mandated increased transparency especially in derivative market
c. Clarified regulatory system
d. Volcker rule: limited banks’ ability to trade for own account
Sarbanes-Oxley
a. Tighten rules of corporate governance
b. More independent directors
c. Each CFO personally responsible for financial statements, creates a new oversight board to oversee auditing of public companies, and prohibits auditors from providing various other services to clients
Commodity Modernization Act
a. allowance for the trading of single stock futures
b. An act passed in 2000 by the U.S Government that reaffirmed the authority of the Commodity Futures Trading Commission for five years as the regulatory body of the American futures markets
