FIN 431 Test 1

commitment of current consumption in the expectation of deriving greater resources in the future

used to produce goods & services; land, buildings, equipment, & knowledge; tangible; generate new income to the economy

claims on real assets or the income generated by them; stocks or bonds; no more than sheets of paper or computer entries

an ownership share in a corporation; residual cash value; tied directly to the success of the firm & its real assets, if successful this is higher

provide payoffs that depend on the values of other assets such as bonds or stock prices; ex. options & future contracts; value comes from some underlying market condition

conflicts of interest when managers, who are hired as agents of the shareholders, may pursue their own interests instead

choice across broad asset classes in contructing an investment portfolio; percentage of funds in each; primary determinant of a portfolio's return

choice of specific securities within each asset class

analysis of the value of securities that might be included in the portfolio; evaluate for investment attractiveness & performance

includes short-term, highly liquid, & relatively low-risk debt instruments; traded in large denominations; treasury bills, CD, commericial paper, bankers acceptances, eurodollars, repos & reverses, & federal funds

short-term government securities issued at a discount from face value and returning the face amount at maturity; most marketable of all money market instruments; represent simplest form of borrowing

a bank time deposit; commit money to bank for a specified time period; $100,000 or more=jumbo one; first $100,000 insured even if bank goes under; 3 months or less=liquid if marketable; when you have money, but don't need access to it right now

short-term unsecured debt issued by large corps; not guaranteed in any way; mature usually in 1-2 months; min. $100,000; interest income fully taxable; 3 months or less=liquid if marketable

an order to a bank by a customer to pay a sum of money at a future date, typically w/i 6 months; bank assumes responsibility for ultimate payment to the holder; considered very safe assets; sell at a discount from the face value of the payment order

dollar-denominated deposits at foreign banks or foreign branches of American banks; for large sums; less than 6 months maturity; pay a higher interest rate than U.S. deposits

short-term sales of gov't securities w/ an agreement to repurchase the securities at a higher price; usually for overnight borrowing; term one can be for 30 days or more; safe in terms of credit risk

funds in the accounts of commercial banks at the Federal Reserve Bank; each required to maintain a min. balance based on the total deposits of their customers; banks w/ excess lend to those w/ a shortage; usually overnight at a rate of interest= Federal funds rate; safe

lending rate among banks in the London market; short-term; base rate for many loans & derivatives

debt obligations of the federal gov't w/ orginal maturities of 1 year or more; bond= 10-30 years; trade in denominations of $1,000; semi-annual interest; exempt from state & local tax; no risk

tax-exempt bonds issued by state & local gov'ts; general obligation= backed by "full faith & credit" of the issuer, fairly safe depending on rating; revenue= used to finance particular projects & backed by revenues from the project or by operator of the project, riskier

long-term debt issued by private corps. typically paying semi-annual coupons & returning the face value of the bond at maturity; how they borrow money directly from the public; if you are holding & corp. goes bankrupt you are S.O.L

ownership shares in a publicly held corp; shareholders have voting rights & may receive dividends; last in line to have a claim on the assets & income of the corp; max. loss is limited to your original investment

nonvoting shares in a corp. usually paying a fixed stream of dividends; has priority over common stock; are not tax-deductible for the issuing firm; corporate tax exclusion on 70% of dividends earned; hybrid security

an avg. computed by adding the prices of the stocks & dividing by a "divisor"; ex. DJIA ; equal number of shares of each stock

computed by calculating a weighted average of the returns of each security in the index, w/ weights proportional to outstanding market value

computed from a simple average of returns; place equal dollar values in each stock of portfolio

the right to buy an asset at a specified price (exercise or strike price) on or before a specified expiration date; means you think the price of the stock will go up; each for the purchase of 100 shares

the right to sell an asset at a specified exercise or strike price on or before a specified expiration date; you are betting the price of the stock will go down; you profit on this increases, when the asset value falls

calls for delivery or sell of an asset at specified maturity date for an agreed upon price (futures price) to be paid at contract maturity; long position=commits to purchasing the specified quantity on the delivery date, hopes prices will go up; short position=commits to delivering the commodity at contract maturity, hopes prices go down below contract price

market for new issues of securities to the public by investment bankers; issuing company receives proceeds form the sale; virgin securities

market for the trading of already-existing & issued securities; existing owner sells to another party; issuing firm does NOT receive proceeds & is NOT directly involved

first sale of stock to the public by a formerly private owned company; investment bankers organize road shows to travel around the country to generate interest, provide info. about offering, & prove info. to co. about the price they will be able to market securities

primary offerings of shares, which are usually sold directly to 1 or a few (small group) institutional or wealthy investors & is generally held to maturity; uses an investment banker; cheaper b/c doesn't require extensive & costly registration w/ SEC

purchase securities from the issuing company & resells them to the public; banker makes firm commitment= co. sells them for the public offering price less a spread that serves as compensation to them

traders specializing in particular assets buy & sell for their own accounts & later resell them for profit from their inventory; save traders search costs b/c prices can easily be looked up; no physical location

all traders meet at one place (either physically or electronically) to buy/sell an asset; ex.= NYSE; no need to search for dealers w/ the best price, if particpants converge mutually agreeable prices will be arrived at; listing requirements=only stocks w/ sufficient trading interest (heavy & frequent trading)

buy quantity of shares at or below specified price; instructs broker to sell when stock price rises above specified price

loss= stock is to be sold if price falls below a stipulated level, to stop further loss from accumulating; buy= specify stock to be brought when its price rises above a limit, to limit potential losses, accompany short sales (of securities you don't own but have borrowed from your broker)

an informal network of brokers & dealers who negotiate sales of securities; an example of a dealer market; dealers quote prices at which they are willing to buy/sell securities & broker then executes a trade by contacting a dealer listing an attractive quote

computer networks that allow direct trading without the need for market makers; particpants post market & limit orders; limit order book available to all; orders that can be matched or crossed against another order are done so automatically w/o intervention of broker; true trading systems, speedy, & offer anonymity; lower transactions costs

a trader who makes a market in the shares of 1 or more firms & who maintains a continuous "fair & orderly market" by dealing personally in the market; execute orders of other brokers; results in an auction market; fills customer's order by adding to or selling their own inventory of stock

the computer-linked price quotation system for the OTC market; dealer market; level 3= market maker fims, can see & enter quotes; level 2= can only receive quotes, can't enter their own; level 1= receive only inside quotes (highest bid & lowest ask price)

secondary markets where already-listed securities are bought & sold by members; NY is the largest in the U.S; for large trades; auction market (w/ centralized order flow)

large transactions in which at least 10,000 shares of stock are bought & sold; block house=aid in the placement of these trades, brokerage firms that specialize in matching block buyers & sellers; keeps identity a secret

a coordinated sale or purchase of a portfolio of stocks

the price at which a dealer or other trader is willing to purchase a security; your sell price

the price at which a dealer or other trader will sell a security; your buy price

the difference between a dealer's bid and asked price

describes securities purchased w/ money borrowed in part from a broker; is the net work of the investor's account; in the account= the portion of the purchase price contributed by the investor

the sale of shares not owned by the investor, but borrowed through a broker & later purchased to replace the loan (hopefully at a lower price than it initially sold for); you begin & end w/ no shares; profit when there's a decline in a security's price

nonpublic knowledge about a corp. possessed by corporate officers, major owners (stockholders), or other individuals w/ privileged access (directors) to info. about the firm

financial intermediaries that invest the funds of individual investors in a potientially wide range of securities or other assets; pooling; reduced transaction costs; professional mgmt (full-time staff); investing for retirement

(market value of assets - liabilities) / shares outstanding ; value of each share

money pooled from many investors that is invested in a portfolio fixed (=unmanaged) for the life of the fund; common w/ bonds; lower mgmt fees; any interest and/or dividends are distributed immediately to certificate holders; provide diversification w/i 1 sector or area

one that issues or redeems its shares at NAV; purchases & redemptions may involve sales charges; most common; liquidity for the investor, fund's ability to grow; need to keep a cash reserve & vulnerable to panics (returns can suffer); common name=mutual fund

shares may not be redeemed or issued, but instead are traded at prices that can differ from NAV (brought & sold among investors in organized exchanges like the NASDAQ); fixed amount or # of shares for sale

a sales commission charged on a mutual fund; makes offering price of an open-end fun exceed NAV; paid to seller (securities brokers & directly by mutual fund groups

a private investment pool, open to wealthy or institutional investors, that is exempt from SEC regulation & can therefore pursue more speculative policies than mutual funds; invest in a wide range of investments; investments can't be withdrawn on many for several years

annual fees charged by a mutual fund to pay for marketing & distribution costs (advertising, promotional literature, &commissions); may use these instead of front-end loads or in addition to them; limited to 1% of a fund's avg. net assets per year; deducted from the assets of the fund

the ratio of the trading activity of a portfolio to the assets of the portfolio; measures the fraction of the portfolio that is replaced each year

offshoots of mutual funds that allow investors to trade index portfolios; can be traded continuously throughout the day; can be sold short or purchased on margin; potientially lower taxes; lower costs (cheaper; no mktg=low fund expenses like mgmt fees)