FINA 4310 Midterm 1

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ropa1712
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100213
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FINA 4310 Midterm 1
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2011-09-13 23:21:19
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FINA 4310 finance investments
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Terms for midterm 1
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  1. Money Market Instruments
    • Treasury Bills
    • Certificates of Deposit
    • Commercial Paper
    • Bankers' Acceptances
    • Eurodollars and LIBOR
    • Repurchase Agreements (RPs) and Reverse RPs
    • Federal Funds*
    • Brokers' Calls*

    *not in notes
  2. Cash
    refers to cash in hand and in bank account, as well as cash equivalents which are Money Market Instruments including short term, marketable, liquid, low-risk debt securities.
  3. Money Markets
    a subsector of the debt market; include short-term (typically less than 1 yr to maturity), highly liquid and marketable, and relatively low-risk debt instruments; often considered cash equivalents
  4. Money Market Mutual Funds (MMMFs)
    pool the resources of many investors and purchase a wide variety of money market securities on their behalf, making them easily accessible to small investors
  5. Treasury Bills (T-bills)
    short-term government securities issued at a discount from face value and returning the face amount at maturity; the most marketable of all money market instruments and represent the simplest form of borrowing; income earned is only taxable at the federal level; this of this rate as the govt risk free rate
  6. Asked Price (T-bills)
    price you have to pay to buy a T-bill from a securities dealer
  7. Bid Price (T-bills)
    slightly lower price you'd receive if you sold a T-bill to a dealer
  8. What is the relationship between prices and yields of bonds?
    they are inversely related
  9. Bank-Discount Method
    a bill's discount from par value is "annualized" based on a 360 day year, and then reported as a percentage of par value.

    Bank Discount Rate = [(face value-market price T-bill)/face value] * (360/number of days to maturity)

    OR rBD=[(P1-P0)/P0]* (360/n)
  10. Equivalent Annual Yield
    uses compounding to turn BEY simple interest rate into a compound annual rate

    Rate=(1+(P1-P0)/P0)365/n
  11. Bond-Equivalent Yield (aka Ask Yield)
    [(P1-P0)/P0]* (365/number of days to maturity)
  12. Certificate of Deposit (CD)
    a bank time deposit; time deposits may NOT be withdrawn on demand; those issued in denominations over $100K are negotiable; short term ones are higly marketable
  13. Commercial Paper (CP)
    short-term unsecured debt issued by large corporations directly to the public rather than borrowing from banks; considered fairly safe and liquid
  14. Asset-Backed Commercial Paper
    issued by financial firms (like banks) to raise funds for the firm to invest in other assets; short term; assets are collateral
  15. Bankers' Acceptance
    an order to a bank by a customer to pay a sum of money at a future date (typically within 6 months); typically a safe asset that trades at a discount from face value; widely used in foreign trade
  16. Eurodollars
    Dollar-denominated deposits at foreign banks or foreign branches of American banks; usually large sums with less than 6 months to maturity
  17. London Interbank Offer Rate (LIBOR)
    lending rate among banks in the London market
  18. Repurchase Agreements (repos or RPs)
    short-term sales of govt securities with an agreement to repurchase the securities at a higher price; short-term, overnight borrowing; essentially a 'one day loan'
  19. Treasury Notes or Bonds
    debt obligations of the federal government with original maturities of one year or more; think of as the safest long term investments
  20. Eurobond
    a bond denominated in a currency other than that of the country in which it is issued
  21. Freddie Mae, Fannie Mac, Ginnie Mae
    organizations that provide liquidity to the mortgage market
  22. Treasury Inflation Protected Securities (TIPS)
    inflation-protected security bonds; provide a constant stream of income in real dollars, and real interest rates are risk-free if held to maturity
  23. Municipal Bonds (munis)
    tax-exempt bonds issued by state and local governments
  24. 2 types of munis
    • 1. general obligation bonds (backed by full faith and credit/taxing power of the issuer)
    • 2. revenue bonds (issued to finance projects)
  25. Industrial Development Bonds
    a revenue bond that is issued to finance commericial enterprises (e.g. a factory that can be operated by a private firm)
  26. Equivalent Taxable Yield
    the rate a taxable bond would need to offer in order to match the after tax yield on a tax-free muni.

    before-tax ROR on taxable bonds*(1-combined federal and local marginal tax rate)=municipal bond rate

    r(1-t)=rm
  27. Corporate Bonds
    long-term debt issued by private corporations typically paying semi-annual coupons and returning the face value of the bond at maturity; higher yield/ riskier bonds
  28. Debenture
    an unsecured bond
  29. Mortgage-backed Security
    either an ownership claim in a pool of mortgages or an obligation that is secured by such a pool; an invested portfolio in mortgage loans through securitization and pooling
  30. Common Stocks
    ownership shares in a public corporation; shareholders have voting rights and may receive dividends; some characteristics include residual claims and limited liability
  31. Preferred Stock
    nonvoting shares in a corporation, usually paying a fixed stream of dividends; has featyres of both equity and debt
  32. American Depository Recepits (ADRs)
    certificates traded in US markets that represent ownership shares of a foreign company
  33. Dow Jones Industrial Average (DJIA)
    consists of 30 large, "blue-chip" corporations; has been computed since 1896
  34. S&P 500
    consists of 500 large companies
  35. Wilshire 5000
    the ultimate US equity index so far computed; index of the market value of essentially all actively traded stocks in the US (approx 6000 of them)
  36. Price-Weighted Average**
    an average computed by adding the prices of the stocks together and dividing by a divisor**
  37. Market Value-Weighted Average**
    computed by calculating a weighted average of the returns of each security in the index, with weights proportional to outstanding market value**
  38. What does NASDAQ stand for?
    National Association of Securities Dealers Automatic Quotation System
  39. Exchange-Traded Fund (ETF)
    a portfolio of shares that can be bought or sold as a unit, just as a single share would be traded
  40. Equally Weighted Index
    an index computed from a simple average of returns
  41. Nikkei
    Japanese index
  42. FTSE
    UK index
  43. DAX
    German index
  44. Hang Seng
    Hong Kong index
  45. TSX
    Toronto Index
  46. CAC
    French Index
  47. OMX
    Swedish index, recently purchased by NASDAQ
  48. SSE Composite
    Shanghai Stock Exchange
  49. EAFE
    Europe, Australia and the Far East; a world benchmark
  50. MSCI
    Morgan Stanley Capital Index; used to invest in countries; computes over 50 country indexes and several regional indexes
  51. Derivative Asset or Contingent Claim
    a security with a payoff that depends on the prices of other securities
  52. Call Option
    the right to buy an asset at a specified price on or before a specified expiration date; only makes sense to exercise if the market value of the asset that may be purchased exceeds the exercise price
  53. Put Option
    the right to sell an asset at a specified exercise price on or before a specified expiration date; profits on these options increase when an asset value falls
  54. Prices of call options ______ as the exercise price _______.
    decrease, increases
  55. Put prices ___________as the exercise price ___________.
    increase, increases
  56. Futures Contract**
    obliges traders to purchase or sell an asset at an agreed-upon price at a specified future date***
  57. 2 Basic positions of Futures
    • Long (buy)
    • Short (sell)
  58. ICE
    Intercontinental Exchange; based in Atlanta; $8 billion market cap, owned by about 18 people which shows that anyone can create and exchange
  59. Primary Market
    Market for new issues of securities; only time the issuer receives the proceeds from the sale
  60. IPO (Initial Public Offering)
    first sale of stock by a formerly private company; stock is marketed through 'road sales' (are only sold through underwriters)
  61. Secondary Market
    market for already existing securities; exisiting owner sells to another party
  62. Market Cap
    price*(shares outstanding)
  63. Flash Crash
    when computer programs stopped sending orders and therefore halted trades, which caused the market to drop by approx 1000 points in an hour
  64. BATS
    stock exchange based in Kansas City, MO that took 10% of total market trading from NYSE
  65. Dark Pool
    type of ATS; offers some anonymity so traderes are not easily identifiable
  66. Dealer Markets
    markets in which traders specializing in particular assets buy and sell for their own accounts
  67. Auction Market
    a market where all traders meet at one place to buy or sell an asset
  68. Bid Price (stocks)
    the price at which a dealer or other trader is willing to purchase/buy a security
  69. Ask Price (stocks)
    the price at which a dealer or other trader is willing to sell a security
  70. Bid-Ask Spread
    ask price - bid price
  71. Market Order
    guaranteed to execute a trade, but no guarantee of price
  72. Limit Order
    guaranteed a price, but no guarantee of execution
  73. Stop-Loss Order
    a limit order that becomes a market order once the price falls through the stop loss price; not guaranteed a price
  74. Over-the-Counter (OTC) Market
    an informal network of brokers and dealers who negotiate sales of securities
  75. ECN (Electronic Communication Network)
    computer networks that allow direct trading without the need for market makers

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