Investment Midterm - From HW

  1. Bid price
    The price at which a dealer is willing to pay to purchase a security.
  2. Ask(ed) price
    The price at which a dealer will sell a security.
  3. Treasury notes/bonds
    Debt obligations of the federal government that make semiannual coupon payments and are issued at or near par value.
  4. Equities
    Ownership shares in a firm.
  5. Equity
    Ownership in a firm. Also, the net worth of a margin account.
  6. Index funds
    Mutual fund holding shares in proportion to their representation in a market index such as the S&P 500.
  7. Capital gains
    The amount by which the sale price of a security exceeds the purchase price.
  8. Yield to maturity
    A measure of the average rate of return that will be earned on a bond if held to maturity.
  9. Par value / principle
    The face value of the bond.
  10. Coupon rate
    A bond's interest payments per dollar of par value.
  11. Credit risk
    Default risk (The possibility that a bond issuer will default, by failing to repay principal and interest in a timely manner. Bonds issued by the federal government, for the most part, are immune from default (if the government needs money it can just print more). Bonds issued by corporations are more likely to be defaulted on, since companies often go bankrupt. Municipalities occasionally default as well, although it is much less common.
  12. Investment grade bonds
    Bond rated BBB and above or Baa and above. Lower-rated bonds are classified as speculative-grade or junk bonds.
  13. Speculative-grade (junk or high-yield) bonds
    Bond rated Ba or lower by Moody's, or BB or lower by Standard & Poor's, or an unrated bond.
  14. Default premium
    A differential in promised yield that compensates the investor for the risk inherent in purchasing a corporate bond that entails some risk of default.
  15. term structure of interest rates
    the pattern of interest rates appropriate for disconting cash flows of various maturities
  16. pure yield curve
    refers to the curve for stripped, or zero-coupon, treasuries
  17. on-the-run yield curve
    refers to the plot of yield as a function of maturity for recently issued coupon bonds selling at or near par value
  18. spot rate
    • the yield to maturity on zero-coupon bonds
    • meaning the rate that prevails today for a time period corresponding to zero's maturity
    • the current interest rate appropriate for discounting a cash flow of some given maturity
  19. short rate
    • the short rate for a given interval refers to the interest rate for that interval available at different points in time
    • a one-period interest rate
  20. forward interest rate
    • rate of interest for a future period that would equate the total return of a long-term bond with that of a strategy of rolling over shorter-term bonds. the forward rate is inferred from the term structure
    • the interest rate (f) that would need to prevail in the second year to make the long- and short-term investments equally attractive, ignoring risk
  21. liquidity premium
    • compensates short-term investors for the uncertainty about the price at which they will be able to sell their long-term bonds at the end of the year
    • forward rate minus expected future short interest rate
  22. Macaulay's duration
    • equals the weighted average of the times until each coupon payment or principal payment made by the bond with weights proportional to the present value of the payment
    • effective maturity of bond
  23. modified duration
    • Macaulay's duration divided by 1+yield to maturity
    • measures interest rate sensitivity of bond
  24. convexity
    • the curvature of the price-yield relationship of a bond
    • can be quantified as the rate of change of the slope of the price-yield curve
  25. immunization
    immunization techniques refer to strategies used by such investors to shield their overall financial status from exposure to interest rate fluctuations
  26. rebalancing
    • realigning the proportions of assets in a portfolio as needed
    • as interest rates adn asset durations change, a manager must rebalance the portfolio of fixed-income assets continually to realign its duration with the duration of the obligation
    • asset durations will change solely because of the passage of time even if interest rates do not change
  27. fundamental analysis
    • research to predict stock value that focuses on such determinants as earnings and dividends prospects, expectations for future interest rates, and risk evaluation of the firm
    • consider the business environment in which the firm operates
  28. business cycle
    • the recurring pattern of recession adn recovery
    • the economy recurrently experiences periods of expansion and contraction, although the length and depth of those cycles can be irregular
  29. cyclical industry
    industries with above-average sensitivity to the state of the economy
  30. defensive industries
    • industries that have little sensitivity to the business cycle
    • industries that produce goods for which sales and profits are least sensitive to the state of the economy
  31. degree of operating leverage DOL
    percentage change in profit for a 1% change in sales
  32. sector rotation
    shift the portfolio more heavily into industry or sector groups that are expected to outperform based on one's assessment of the state of the business cycle (macroeconomic forecasts)
  33. industry life cycle
    • start-up state - extremely rapid growth
    • consolidation state - growth that is less rapid, but still faster than that of general economy
    • maturity stage - growth no faster than the general economy
    • stage of relative decline - grows less rapidly than the rest of the economy, or actually shrinks
  34. liquidation value
    • net amount that could be realized by selling the assets of a firm after paying the debt
    • represent amount of money that could be realized by breaking up the firm, selling its assets, repaying its debt and distributing the remainder to the shareholders
    • if the market price of equity drops below liquidation value, the firm becomes attractive as a takeover target, which could lead to liquidation after taken over
  35. intrinsic value V0
    present value of all cash payments to the investor in the stock, including dividends as well as proceeds from the ultimate sale of the stock, discounted at the appropriate risk-adjusted interest rate, k
  36. dividend discount model (DDM)
    a formula stating that the intrinsic value of a firm is the present value of all expected future dividends
  37. plowback ratio / earnings retention ratio
    • the proportion of the firm
    • s earnings that is reinvested in the business (and not paid out as dividends).
    • the plowback ratio equals 1 minus the dividend payout ratio
  38. present value of growth opportunities (PVGO) / net present value / NPV
    net present value of a firm's future investments
  39. price-earnings multiple / price-earning ratio / P/E multiple
    the ratio of a stock's price ot its earnings per share
  40. Income statement
    a financial statement showing a firm's revenues and expenses during a specified period
  41. balance sheet
    an accounting statement of a firm's financial position at a specified time
  42. statement of cash flows
    a financial statement showing a firm's cash receipts and cash payments during a specified period
  43. economic earnings
    the real flow of cash that a firm could pay out forever in the absence of any change in the firm's productive capacity
  44. return on equity (ROE)
    an accounting ratio of net profits divided by equity
  45. return on assets (ROA)
    a profitability ratio; earnings before interest and taxes divided by total assets
  46. return on sales (ROS) / profit margin
    the ratio of operating profits per dollar of sales (EBIT divided by sales)
  47. times interest earned
    ratio of profits to interest expense
  48. current ratio
    a ratio representing the ability of the firm to pay off its current liabilities by liquidating current assets (current assets/current liabilities)
  49. net asset value (NAV)
    the value of each share expressed as assets minus liabilities on a per-share basis
  50. open-end (mutual) fund
    a fund that issues or redeems its own shares at their net asset value (NAV)
  51. hedge fund
    a private investment pool, open to institutional or wealthy investors, that is largely exempt from SEC regulation and can pursue more speculative policies than mutual funds
  52. high water mark
    the previous value of a portfolio that must be reattained before a hedge fund can charge incentive fees
  53. exchange-traded fund (ETFs)
    offshoots of mutual funds that allow investors to trade portfolios of securities just as they do share of stock
  54. effective-annual rate (EAR)
    interest rate is annualized using compound rather than simple interest
  55. risk premium
    • an expected return in excess of that on risk-free securities
    • the premium provides compensation for the risk of an investment
  56. risk-averse
    A risk-averse investor will consider risky portfolios only if they provide compensation for risk via a risk premium
  57. risk-neutral
    a risk-neutral investor finds the level fo risk irrelevant and considers only the expected return of risk prospects
  58. risk lover
    a risk lover is willing to accept lower expected returns on prospects with higher amount of risk
  59. risk-free asset
    an asset with a certain rate of return; often taken to be short-term t-bills
  60. risk-free rate
    the interest rate that can be earned with certainty
  61. normal distribution
    bell-shaped probability distribution that characterizes many natural phenomena
  62. diversification
    spreading a portfolio over many investments to avoid excess exposure to any one source of risk
  63. systematic risk / market risk
    risk factors common to the whole economy, nondiversifiable risk
  64. firm-specific risk / diversifiable risk
    risk attributable to firm-specific risk, or nonmarket risk
  65. minimum-variance frontier
    graph of the lowest possible portfolio variance that is attainable for a given portfolio expected return
  66. minimum-variance portfolio
    the portfolio of risky assets with lowest variance
  67. portfolio opportunity set
    the expected return - standard deviation pairs of all portfolios that can be constructed from a given set of assets
  68. reward-to-volatility ratio
    ratio of excess return to portfolio standard deviation
  69. optimal risky portfolio
    an investor's best combination of risky assets to be mixed with safe assets to form the complete portfolio
Card Set
Investment Midterm - From HW
Investment Midterm - From HW