You wish to purchase stock from your broker. Your purchase will most likely be in the ______________________ market.
Secondary (Page 23)
A ________________ takes a position in a security while a ________________ brings two parties together.
Dealer/broker (Pages 22)
Give an example of a Federal government security issued with a maturity of less than one year. __________________________
Treasury bill (Page 25)
Common stockholders receive a return on their investment in the form of common stock ________________________.
Dividends (Page 29)
The prevailing rate of interest in any situation is called the________________ ___________________________.
Nominal interest rate (Page 29)
The up or down adjustment that lenders make to their current interest rates to compensate for the uncertainty as to the change in rates is the ________________________ premium.
Maturity (Page 31)
Investment bankers arrange securities sales on a _____________________ basis when the investment banker purchases all the new securities from the issuing company and then resells them to the public.
Underwriting (Page 22)
Large-denomination CDs (over $100,000) are considered __________________ CDs.
Negotiable (Page 26)
The two types of corporate stock are ___________________________and _________________________________________.
Common and Preferred (Page 28)
Bonds issued by state and local governments are known as ________________.
Municipal bonds (Page 28)
The face value of a bond can also be called ________________ or ___________________________________.
Par value, principal value (Page 27)
Bonds that do not pay any coupon interest are called ___________________
Zero-coupon bonds (Page 27)
Define a bond:
it is an IOU that promises to pay the owner a certain amount of money on some specified date in the future, and in most cases, interest payments at regular intervals until maturity. (Page 26)
What is the role of a financial intermediary?
Financial intermediaries act to put those in need of funds in contact with those who have funds available. (Page 22)
A short-term promissory note issued by large corporations with a strong credit rating is called
Commercial Paper (Page 26)
List the different types of premiums added to the real rate of interest.
Default risk, liquidity risk, maturity risk, and inflation (Page 30)
List the three items which help to make a market efficient. ______________________________________
Quick execution, low commissions, and small dealer spreads (Page 25)
If a market has no fixed location of business, it said to be
OTC (Page 24)
Short-term securities are traded in the ______________ market, and long-term securities trade in the __________________ market.
Money/capital (Page 24)
Define the real rate of interest.
The real rate of interest does not include adjustments for any other factors. (Page 29)
Discuss the differences between the nominal and real rates of interest.
The nominal interest rate is the prevailing rate of interest in any situation and includes the real rate of interest plus other components. The real rate of interest is a basic return demanded by lenders. It does not include any other components. (Page 29)
What is the difference between an inflation premium and a maturity premium?
Inflation erodes the purchasing power of money; therefore, lenders who anticipate inflation during the term of a loan will demand additional interest to compensate for it. The maturity premium simply compensates lenders for the uncertainty or risk of up and down adjustments of interest rates over time. (Page 30)
If the real rate of interest is 3%, inflation is expected to be 2% during the coming year, and the default risk premium, liquidity risk premium, and maturity risk premium for the bonds of Company Simlock are all 1.5% each, what would be the yield on a Simlock bond?
9.5% (Pages 29-31)
Using the information in question 2-24, assume that inflation turns out to be 3%. Discuss the impact on the borrower and lende
Lenders would be hurt; their real return is lower. Borrowers would benefit, however, as the amount of money repaid is lower in real terms. (Page 29)
All else equal, explain which bond would have a higher interest rate; an AA rated bond or a BB rated bond?
A BB rated bond would have a higher interest rate because, by definition, it has more default risk—thus a higher default risk premium. (Page 31)
All else equal, which would offer a higher interest rate: a three-month T-bill or a three-year Treasury note? Explain.
The T-note would have a higher maturity risk to compensate for maturity risk assuming a normal yield curve. (Page 31)
What is the difference between an organized exchange and the OTC market?
An organized exchange has a physical location while the OTC has no fixed location—it is everywhere. (Page 24)
I would rather have a T-bill than a T-note because the T-bill is safer—its maturity is less than one year. Comment.
The T-Bill has less maturity risk, however, it is not safer with respect to default risk. By definition, all federal government bonds are essentially default free. (Page 25)
The economy is suffering from a recession; explain what will happen to the yield spread between a Treasury bond and a BBB rated corporate bond.
The spread widens with more risk associated with a BBB bond. Yield rises and the price falls. (Page 31)
A dealer would never act as a broker. Comment.
While a dealer primarily takes position in securities, there is nothing preventing him/her from also acting as a broker if the occasion would require it. (Pages 23)
A school bond issue is an example of a general-obligation municipal bond. Explain whether you agree or disagree with this statement.
Yes this would be a general-obligation bond because this bond would most likely be paid off with money raised by the issuer from tax revenue sources as public schools generate little revenue. (Page 28)
If expected inflation is 4% and the nominal risk-free interest rate is 5%, what is the real rate of interest?
Nominal rate = real rate plus expected inflation: 5%=1%+4% (Page30)
If the nominal risk-free rate of interest is 8% and the real rate of interest is 2.5%, what is the expected inflation rate?
Nominal rate = real rate plus expected inflation: 8% = 2.5% + 5.5% (Page 30)
The more liquid the financial instrument, the narrower the spread between the bid and ask price. Explain why you agree or disagree with this statement.
This statement is true. The more liquid the financial instrument, the narrower the spread. A liquid instrument provides less risk for the dealer because it is easier to find a buyer. He/she will not need as much compensation for this risk as would be the case with a less liquid security. (Page 31)
A bearer is a
Person or organization that holds a security
_____________ States when you are to be paid from security
3 Financial intermediaries are?
• Investment bankers
Exist to help businesses, state, and local governments sell their securities to the public
The "Best effort basis" is when the ?
Investment banker will try its best to sell the securities for the desired price, but there are no guarantees
securities created and sold for first time, are sold in the ______________________?
previously issued securities are traded among investors in the
short term securities (1 year or less) Ex. Treasury bills, negotiable certificates of deposit, commercial paper... are located in the ______________?
Capital markets are _________________?
Long term securities (over a year)
Bonds and stocks are examples of a ___________ Market?
An organization that facilitate trading of stocks and bonds among investors is known as the ______________________________?
Nasdaq is the largest and best known ________ for common stock
Over the Counter Market
"Market efficiency" refers to
the ease, speed, and cost of trading securities
Securities in the money market are ?
Very liquid; mature quickly and can be sold for cash easily
Buyers of money market securities include
governments, corporations, and financial institutions, that want to raise money for a short time
Essentially having no risk, These money market securities are issued to finance the federal budget deficit and to refinance the billions of dollars previously issued government securities issued each week. Best known as _______________?
Pieces of paper that certify that you have deposited a certain amount of money in the bank to be paid back on a certain date with interest is called the __________________________?
Negotiable certificates of deposit
Commercial paper is ?
a type of short term promissory note issued by large corporations with strong credit ratings
"Bankers acceptance" is a _______ term debt instrument that is guaranteed for payment by a commercial bank
Amount that the bond promises to pay its owners at some date in the future is known as the
Face value is also called the principal or the ____ ____________?
When governments, corporations, financial institutions want to raise money for a long period of time they issue securities in the
face value, maturity date, and coupon interest are three features of _________?
The interest payments made to the bond owner during the life of the bond is the _____________ _________?
T-notes have initial maturities from _______ years
T-bonds have maturities greater than _______ years
_________ and __________ pay interest semiannually in addition to the principal, which is paid at maturity
When federal government wants to borrow money for period more than a year it issues __________ or ____________
general obligation bonds and revenue bonds are two types of _____________ ________?
General obligation bonds are suppose to be paid off with.....?
money raised by the issuer from a variety of different tax revenue sources
Revenue bonds are suppose to be paid off with.....?
with money generated by the project the bonds were issued to finance
Like T-bonds and T-notes except they are issued by corporations are called...?
Investment grade bonds are considered....?
Relatively safe bonds
Relatively risky bonds that are generally issued by troubled companies are _________ _______?
If dividends are declared by the board directors of a business, they are paid to ______________ stockholders first
Holders of a company's ___________ stock are simply the owners of the company
Prevailing rate of interest in any situation and The total of a number of separate components is called the _____________ _________ rate
Compensate for the burden of losing investment opportunities while they postpone their spending, lenders demand, and borrowers pay a basic rate of return called the ......?
real rate of interest
Lenders who anticipate inflation during the term of a loan will demand additional interest to compensate for it called.....?
What represents the return or compensation a lender demands before agreeing to lend money
Nominal risk free rate contains
the real rate of interest and a premium to cover expected inflation
If borrower has financial difficulties, __________ risk premium is the extra compensation lenders demand for assuming the risk of default
Has a higher interest rate to compensate the lender for the inconvenience of being stuck with the loan until it matures
illiquidity risk premium
Up or down adjustment that lenders make to their current interest rate to compensate for the uncertainty about the future changes in rate
Maturity risk premium
A graphical depiction of interest rates for securities that differ only in the time remaining until their maturity dates is called the ________ __________
Borrowers tend to look for the _____ point of the curve, which indicated the ______ expensive loan maturity
Lenders tend to look for ______ point on curve, which indicates the _______ expensive loan maturity