Week 1

Question 1

Investment (definition)

Answer 1

The process of committing funds to one or more asset that will be held over some future periods with the expectation of wealth generation

Question 2

Expected return (definition)

Answer 2

The anticipated return expected by investors over some future holding period

Question 3

Realised return (definition)

Answer 3

The actual return on an investment over some previous period

Question 4

Risk (definition)

Answer 4

The chance that the realised return on an investment will differ from the expected return

Question 5

Risk tolerence (definition)

Answer 5

The extent of risk that an investor is willing to undertake

Question 6

Risk-return tradeoff (definition)

Answer 6

The principle that the higher the risk the higher the reward

Question 7

Risk and return have what type of relationship?

Answer 7

Positive

Question 8

What is an example of a risk free security?

Answer 8

Government bonds

Question 9

Direct investment (definition)

Answer 9

Where investors buy and sell securities themselves, typically through brokerage accounts

Question 10

Indirect investment (definition)

Answer 10

Where investors buy and sell shares of investment companies which, in turn, hold portfolio of securitites

Question 11

Example of a non-marketable financial asset

Answer 11

Savings account

Question 12

Example of a marketable financial asset

Answer 12

Stocks and bonds

Question 13

Money market security (definition)

Answer 13

Securities with an original maturity of 1 year or less. Highly-liquid and considered very safe. Issued by governments or private firms

Question 14

Capital market securitites

Answer 14

Securities with more than 1 year in original maturity

Question 15

What are the four types of bonds

Answer 15

• corporate bonds-issued by companys for debt financing
• municipal bonds
• government bonds
• agency bonds

Question 16

Why might a company issue bonds rather than get a bank loan?

Answer 16

Bond market offers more favourable terms and has lower interest rates

Question 17

Preferred stock (definition)

Answer 17

Shares of a company with dividends that are paid out before common stock dividends are issued. The dividend is fixed. Typically do not hold voting rights

Question 18

Common stock (definition)

Answer 18

Equity security representing ownership. ‘Residual claimants’ on income and assets and have no promise from the company to recieve dividends. Typically have voting rights

Question 19

Book value (definition)

Answer 19

The accoutning value of the equity as shown on the balance sheet

Question 20

Aggregate market value (definiton and how to calculate)

Answer 20

Measures the total value of all outstanding equity shares. Calculated by multiplying price per share with the cumber of shares

Question 21

Dividend yield (definition and how to calculate)

Answer 21

The percentage of a compnays share price that it pays out in dividends. Calculated by divinding the dividend per shar with the stock price

Question 22

Payout ratio (definition and how to calculate)

Answer 22

Percentage of net income a firm pays to its stock holders. Dividing dividends with net income

Question 23

P/E ratio (definiton)

Answer 23

Ratio of stock price to historical or estimated earnings. Basically shows how much the market pays for $1 of earnings

Question 24

Stock dividend (definition)

Answer 24

A payment by the corporation in shares of stock rather than cash

Question 25

Stock split (definition)

Answer 25

A corporate action that divides each share into multiple shares

Question 26

Why do companys split stock?

Answer 26

- preffered trading range for stock is between $10-$100. Less attractive to investors if outside that range - conveys positive information about the firms performance. Unsuccesful companys wouldn’t split stock - generates publicity

Question 27

What is a derivative?

Answer 27

Instruments whos value is derived based on prices of other assets

Question 28

Options (definition)

Answer 28

Financial derivative that gives the buyer the right to buy and sell the underlying asset at a stated prices within a specififed period

Question 29

Futures (definiton)

Answer 29

Financial derivative that obligate the parties to transact an asset at a predetermined future date and price

Question 30

Forwards (definition)

Answer 30

A financial derivavtive that is an agreement between two parties to undertake an exchange at an agreed future date at a price agreed now

Question 31

Swaps (definition)

Answer 31

A derivative contract in which one party exchanges one stream of cash flow for another from another party

Question 32

Hedgers-what they use derivatives for example

Answer 32

Wheat farmer and buyer. Agree to a fixed price to buy wheat as the price fluctuates. Goal to reduce potential loss

Question 33

Speculators

Answer 33

Speculators trade based on their educated guesses on where they believe the market is headed. For example, if a speculator thinks that a stock is overpriced, they may sell short the stock and wait for the price to decline, at which point it can be bought back for a profit.

Question 34

Primary market

Answer 34

Market for new issues of securities, typically through investment bankers. Raising captial for firms

Question 35

Secondary market

Answer 35

Buying and selling exisiting assets. Such as LSE and NYSE