Reading #46 Flashcards Preview

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Flashcards in Reading #46 Deck (40)
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1
Q

Three main functions of the fin. system

A
  1. allow entities to save & borrow money 2. determine returns that = supply and demand 3. allocate capital to most efficient use
2
Q

equilibrium int. rate

A

rate which amt of individ., bus, and govt desire to borrow = desire to lend

3
Q

define debt securities

A

promises to repay funds

4
Q

define equity securities

A

represent ownership positions

5
Q

define derivative contracts

A

values depend on values of other assets

6
Q

financial derivative contracts versus physical der. contracts

A

financial based on equities, debt, etc, physical based on value of gold, oil, wheat, etc

7
Q

define spot market

A

markets for immediate delivery

8
Q

primary versus secondary market

A

primary is for newly issued securities vs subsequent sales is secondary market

9
Q

money market vs. capital market

A

money market is for less than year, capital is for longer term debt and equity securities

10
Q

traditional investment markets vs alt. markets

A

trad = debt and equity, alt = hedge funds and etc

11
Q

define common stock

A

residual claim on firm’s assets

12
Q

definte preferred stock

A

equity security with scheduled dividends that do not change usually over security’s life

13
Q

define warrants

A

similar to options (giving right to buy firm’s equity shares) at fixed exercise price prior to expiration

14
Q

types of pooled investment vehicles

A

mutual funds, depositories, and hedge funds

15
Q

forward vs future contract

A

forward is agreement to buy sell asset in future as specific price and not traded on exchanges. future is standardized so that they are liquid investments

16
Q

define swap contract

A

2 parties make equal payments to one asset being traded for another .(currency swap = one loan in 1 currency for loan of another currency)

17
Q

define option contract

A

gives owner right to buy or sell asset at specific exercise price at some specified time in the future

18
Q

CALL VS PUT Option

A

call = gives buyer right to buy option, put = right to sell the

19
Q

define insurance contract

A

pays cash amt if future event occurs

20
Q

define credit default swaps

A

form of insurance that makes a payment if an issuer defaults on its bonds

21
Q

define a financial intermediary

A

stands between buyer and seller

22
Q

define a dealer

A

they facilitate trading by buying for or selling from their own inventory

23
Q

define broker-dealer

A

they seek best prices but goal is to profit through prices or spreads

24
Q

define securitizer

A

pool large amounts of securities and then sell interest in the pool to other investors (ex. mortgages)

25
Q

examples of depository institutions

A

banks, credit unions, savings and loans. they pay int. on customer deposits and provide transaction services such as checking accounts

26
Q

insurance companies - primary or intermediary?

A

intermediary that collect insurance premiums in return for providing risk reduction to insured

27
Q

define moral hazard

A

when insured may take more risks once is he is protected against losses

28
Q

define adverse selection

A

when most likely to experience losses are most likely to buy insurance

29
Q

define arbitrage

A

buying an asset in one market and reselling in another at a higher price

30
Q

define clearing house

A

intermediaries btwn buyer and seller for things like escrow services

31
Q

define counterparty risk

A

risk that other party to transaction will not fulfill obligation

32
Q

LONG v. SHORT Position

A

long = right/obligation to purchase an asset, short = right/obligation to replace asset in future

33
Q

define payment in lieu of dividends

A

in a short sale, when short seller must pay all div to lender

34
Q

define short rebate rate

A

rate that broker would earn from interest on funds

35
Q

define leverage position

A

use of borrowed funds to purchase and asset

36
Q

define buying on margin

A

investors who use leverage to buy securities by borrowing from their brokers

37
Q

define call money rate

A

interest rate paid on leveraged funds - generally higher than govt’ bill rate, but lower for larger investors with better collateral

38
Q

define initial margin requirement

A

min. amt of equity for new margin purchase

39
Q

who decides the amt for initial margin requirement?

A

govt, exchange, broker or clearinghouse

40
Q

define leverage ratio

A

value of asset / value of equity position