FIN 431 Test 1

  1. investment
    commitment of current consumption in the expectation of deriving greater resources in the future
  2. real assets
    used to produce goods & services; land, buildings, equipment, & knowledge; tangible; generate new income to the economy
  3. financial assets
    claims on real assets or the income generated by them; stocks or bonds; no more than sheets of paper or computer entries
  4. common stock or equity
    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
  5. derivative securities
    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
  6. agency problem
    conflicts of interest when managers, who are hired as agents of the shareholders, may pursue their own interests instead
  7. asset allocation
    choice across broad asset classes in contructing an investment portfolio; percentage of funds in each; primary determinant of a portfolio's return
  8. security allocation
    choice of specific securities within each asset class
  9. security analysis
    analysis of the value of securities that might be included in the portfolio; evaluate for investment attractiveness & performance
  10. money market
    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
  11. treasury bills (T-bills)
    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
  12. certificates of deposits (CD)
    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
  13. commercial paper
    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
  14. bankers' acceptances
    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
  15. eurodollars
    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
  16. repurchase agreements (repos or RPs)
    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
  17. federal fund
    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
  18. LIBOR (London Interbank Offer Rate)
    lending rate among banks in the London market; short-term; base rate for many loans & derivatives
  19. U.S. treasury notes or bonds
    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
  20. municipal bonds
    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
  21. corporate bonds
    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
  22. common stock
    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
  23. preferred stock
    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
  24. price-weighted average
    an avg. computed by adding the prices of the stocks & dividing by a "divisor"; ex. DJIA ; equal number of shares of each stock
  25. market-value weighted index
    computed by calculating a weighted average of the returns of each security in the index, w/ weights proportional to outstanding market value
  26. equally weighted index
    computed from a simple average of returns; place equal dollar values in each stock of portfolio
  27. call option
    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
  28. put option
    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
  29. futures contract
    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
  30. primary market
    market for new issues of securities to the public by investment bankers; issuing company receives proceeds form the sale; virgin securities
  31. secondary market
    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
  32. initial public offerings (IPO)
    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
  33. private placement
    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
  34. underwriters
    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
  35. dealer markets
    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
  36. auction markets
    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)
  37. limit order
    buy quantity of shares at or below specified price; instructs broker to sell when stock price rises above specified price
  38. stop orders
    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)
  39. over-the-counter (OTC) market
    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
  40. electronic communication networks (ECNs)
    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
  41. specialist
    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
  42. NASDAQ stock market
    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)
  43. stock exchange
    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)
  44. block transactions
    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
  45. program trade
    a coordinated sale or purchase of a portfolio of stocks
  46. bid price
    the price at which a dealer or other trader is willing to purchase a security; your sell price
  47. ask price
    the price at which a dealer or other trader will sell a security; your buy price
  48. bid-ask spread
    the difference between a dealer's bid and asked price
  49. margin
    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
  50. short sale
    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
  51. inside information
    nonpublic knowledge about a corp. possessed by corporate officers, major owners (stockholders), or other individuals w/ privileged access (directors) to info. about the firm
  52. investment companies
    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
  53. net asset value (NAV)
    (market value of assets - liabilities) / shares outstanding ; value of each share
  54. unit investment trusts
    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
  55. open-end fund
    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
  56. closed-end 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
  57. load
    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
  58. hedge fund
    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
  59. 12b-1 charges
    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
  60. turnover
    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
  61. exchange-traded funds
    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)
Card Set
FIN 431 Test 1
Chapter 1-4