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FIN 3403 Test 3 cards
Terms in this set (130)
capital markets are for securities with an original maturity of ______ than one year.
Bonds, stocks, mortgages
Examples of capital markets include: _______, _______, ________
Federal and Local Governments, Corporations
Primary issuers of securities include: _____,______
The largest purchasers of securities are ________
____: When a firm sells a security for the first time.
Primary market transactions
______ _______ ______ are the subsequent sales of a firm's new stocks or bonds to the the public
______ ________ are a building where securities trade
Over the counter exchanges
___________ ______________ ____________ _____________ are dealers at diff locations who have an inventory of securities that are ready to buy and sell to any customer
_______ are securities that represent debt owed by the issuer to the investor, and typically have specified payments on specific dates
treasury bonds have _____ default risk
Treasury Inflation Protected Securities (TIPS)
____________ are when the principal amount of the security is tied to the current rate of inflation. Protects investor purchasing power.
Separate Trading of Registered Interest and Principal Securities (STRIPS)
__________ are when the coupon payments are stripped from a T-bond and sold as individual zero coupon bonds.
________ are issued by government sponsored entities, such as the the Student Loan Marketing Assoc., Federal Housing Admin, and Fannie Main.
Agency bonds carry ______ risk since the government provides an implicit guarantee that the wont let the debt default
local, county, and state governments
municipal bonds are issued by ___________________
general obligation bonds, revenue bonds
the two types of muni bonds are _________
general obligation bonds
_______________ are muni bonds that are backed by the "full faith and credit" of the issuer. These dont have specific assets pledged as security or a specific source of revenue allocated for their repayment
_____________ are muni bonds that are backed by the cash flow of a particular revenue generating project. Ex. a toll bridge
Muni bonds ____ default
corporate bonds typically have a face value of ________
corporate bonds typically pay interest _______
in the past, _______ were sold with attached coupons that the owner of the bond clipped and mailed to the firm to receive interest payments.
________ are used to facilitate better tracking of interest payments for IRS reporting purposes
degree of _____ varies with each bond, even from the same issuer
_____________ impose rules and restrictions on managers designed to protect the bondholders' interests( Ex. limit the amount of dividends the firm can pay)
____ state that the issuer has the right to force the holder to sell the bond back (ex. requires a waiting period)
_________ requires the firm to pay off a portion of the bond issue each year. reduces the probability of the issue defaulting when it matures.
_________ some bonds may be converted to equity. they are similar to stock options, but typically more limited.
_____________ are corporate bonds with collateral attached. Theyre less risky than comparable unsecured bonds and as a result have a lower interest rate. (ex. mortgage bonds, equip trust certs)
__________ include debentures and subordinated debentures.
_______ are long term unsecured bonds that are backed only by the general creditworthiness of the issuer.
____________ are similar to debentures except that they have a lower priority claim
variable rate bonds
_________ (can be secured or unsecured) and feature an interest rate that is tied to another interest rate, such as the rate on Treasury bonds, and is adjusted periodically
__________ (aka speculative bonds; non investment grade bonds) are bonds rated below Standard & Poor's BBB rating.
Junk bonds are anything below ____ in Moodys and below ___ in S&P's
A _____________ ensures that the lender (bond purchaser) will be paid both principal and interest in the event the issuer defaults. This causes lower risk and is generally backed by large insurance companies.
Credit default swap (CDS)
A ______________ provides insurance against default in the principal and interest payments of a credit instrument. J.P. Morgan introduced these in 95.
In 2008 CDS's outstanding were __________ which exceeded the entire GNP of the world.
coupon interest rate
_________ is the stated annual interest rate on the bond. It is usually fixed for the life of the bond.
__________ is the coupon interest payment divided by the current market price of the bond
__________ is the maturity of the bond. The holder of the bond will receive the face amount from the issuer when the bond matures. this is synonyms with par value.
_________ is the contract that accompanies a bond and specifies the terms of the loan agreement. It includes management restrictions, called covenants.
________ is the interest rate currently in effect in the market for securities of like risk and maturity. It is used to value bonds.
_______ is the number of years or periods until the bond matures and the holder is paid the face amount.
yield to maturity
_________ is the yield an investor will earn if the bond is purchased at the current market price and held until maturity.
general obligation bonds
____________ must be awarded to the lowest bidder
if the coupon rate is > YTM then it is a _________
if the coupon rate is < YTM then it is a __________
investing in stocks represents _______ in a firm.
stockholders have a ______ on all assets of a firm
stockholders ________ have the right to vote for directors and on certain issues.
the two ways stockholders can earn return is by_____________ and ___________
the two types of stock are __________ and __________
________ are what preferred stock is because it has features of both debt (reasonably determinable cash flows) and equity (no maturity, dividends are not deductible, and bankruptcy will no result from nonpayment of dividends)
the claim that preferred stockholders have on dividends and assets comes ________ the claim of common stockholders.
the claim that preferred stockholders have on dividends and assets comes ________ the claim of debt holders.
stocks are a _______ investments than bonds
common stocks are a _______ investment than preferred stocks
common stock can only lose what they have invested. this is known as _________.
when a all other share holders (debt holders and preferred stock holders) have been paid then common stock holders are paid. this is known as ___________.
stockholders may vote at the corporations annual meeting, or they may give their _____ to someone else. Management is always happy to vote your shares for you.
the best known ________________ is the NYSE, which has a daily volume of around 4 billion shares. These have auction markets with floor specialists.
over the counter market
the best known _____________ is the NASDAQ. Dealers at these stand ready to make a market.
Electronic Communication Networks (ECNs)
_________ allow brokers and trader to trade without the need of middleman. These are both transparent and faster, but they only work for high volumes.
Exchange Traded Funds (ETFs)
____________ are a recent innovation where a basket of securities is purchased and a stock is created based on the basket. It is then traded on an exchange. these provide certain valuation, but require a commission.
The One Period Valuation model in words is :the stock price today equals the sum of next years expected _________ and ________
dividends grow at a constant rate forever, growth rate is less than the required return.
what are the 2 key assumptions of the generalized dividend valuation model?
dividends, final sales price
The generalized dividend valuation model in words is: the stock price today equals the sum of all future ________ and the _________
dividends, dividends grow at a constant rate
The Gordon Growth model in words is: the stock price today equals the sum of all ___________ and the _________________
pay for one dollar of earnings from a firm
The price earnings ration measures how much the market is willing to ____________________
generally speaking, the market price will depend on the ___________
estimating growth, estimating risk, forecasting dividends
the three main problems with applying the valuation models are ___________________
Dow Jones Industrial Average (DJIA)
___________ includes 30 large industrial stocks (price weighted average)
__________ includes 500 large-capitalization common stocks. (market value weighted)
__________ includes over 3000 stocks. commonly an indicator of how high tech and growth companies are performing. (Market value weighted)
lower dividend growth, more risk
The 07-09 financial crises was associated with ___________ and __________ which caused lower stock prices
protect industries, maintain the integrity
the primary mission of the SEC is to __________ and __________ of the securities market
division of corporate finance
the ___________________ is responsible for collecting, reviewing, and making available documents that public companies are required to file, such as: annual reports and registration statements.
division of market regulation
the ___________________ establishes and maintains rules for orderly and efficient markets
division of investment management
the __________________ oversees and regulates the investment management industry
division of enforcement
the ________________ investigates violations of the rules and regulations established by other divisions
to raise capital, diversify ownership, and enhance liquidity
why might a firm want to go public?
1. choose and investment bank
2. file a registration statement with the SEC (form S-1)
3. select a price range for the preliminary prospectus
4. go on a road show
5. set a final offer price for the final prospectus, also filed with the SEC (form 424b4)
what are the 5 steps to an IPO?
form S-1 (at registration statement) and form 424b4 ( at final offer price)
what forms must be filled out with the SEC and when?
____________ is the underwriter that assists the company by pricing and marketing the initial offering of stock.
When a firm hires more than one investment bank the group formed is called a ________
_________ is when the IPO is well below the closing stock price on the first day of trading. The margin is known as a pop.
money left on the table
______________ refers to the amount of money the company left on the table because the money went to investors instead.
hot issue IPO market
_______________ is a market where IPO's are in "hot" demand. Large pops are particularly prevalent in these markets. For example eBay in the 90's.
The _________ begins on the first day of trading and usually ends several months or a year after the IPO. Since underwriters typically allocate shares to large institutional investors, retail investors (like you and me) will usually buy a newly public IPO here.
______________ can sell all or part of their stake in a company during an IPO. They get to keep the proceeds from the sale of their shares. its not good if a large portion of the shares offered in an IPO come from them.
it is common for IPO's to ________ perform in the long run.
weak, semi strong, strong
What are the three forms of the EMH
_________ of market efficiency means current prices will reflect past.
semi strong form
_________ of market efficiency means current prices reflect all publicly available information.
_________ of market efficiency means the current prices reflect all information.
which form of EMH prevails?
_________ are agreements by two parties to engage in a financial transaction at a future point in time.
what, where, how much, when
forward contracts specify these 4 things: _________
what is a key advantage of forward contracts? they are _______
lack of liquidity, subject to default risk
what are two disadvantages of forward contracts?
financial futures contracts
__________are similar to forward contracts in that they are an agreement between two parties to engage in a financial transaction at a future point in time
at expiration date, the price of the contract is ________ the price of the underlying asset delivered.
liquidity, limited ability to corner the market, protection against losses, no delivery requirement
Why might an individual choose to invest in a financial futures contract instead of a forward contract?
futures contracts are ____ liquid than forward contracts and are sold in ______ contracts
_________ are marked to market daily. Which protects against losses.
making an offsetting purchase of another futures contract
A trader can avoid delivering on a futures contract by ________________________.
stock market risk
__________ is the risk that occurs due to fluctuations in equity market prices
stock index future
____________ is an instrument used to hedge stock market risk
interest rate swaps
_____________ involve the exchange of one set of interest payments for another set of interest payments all denominated in the same currency
plain vanilla swap
____________ is the simplest form of interest rate swaps. It specifies: the rates being exchanged, types of payments, notional amount.
interest rate risk
Primary advantage of interest rate swaps: Reduces __________ without having to rearrange balance sheets.
lack of liquidity
Primary disadvantage of interest rate swaps: Swap markets, like forward markets, can suffer from a ______________.
________ are financial instruments that trade on exchanges.
before, at expiration
American options may be exercised _______ they expire, but European options may only be exercised _________.
the holder of the _________ has the right to purchase the stock from the writer at a specified price for a specified time.
the holder of the _______ has the right to sell the stock to the writer at a specified price for a specified time.
the specified price at which stock is purchased (sold) with a call (put) option is called the _________.
the specified time period during which an American option may be exercised is called the ______________, or maturity.
______ is the price paid by the holder to the seller to purchase an option.
exercise (intrinsic) value
__________ is the immediate profit earned from exercising the option. It WILL differ from the premium prior to the options expiration. never negative because they wouldnt exercise if it was.
the option holder is ______ the option, while the writer is ______ the option.
______ is an option trader who has or will have a position in the underlying asset
_________ is an option trader who has no position in the underlying asset
in the money
an option is ___________ if it is profitable to exercise immediately (intrinsic is positive). call option would be this if S>X. Put option is this is S<X.
at the money
an option is __________ if the stock price equals the exercise price
out of the money
an option is _________ if the inequality is the reverse of the same option when it is in the money.
A _________ is an agreement between 2 parties to engage in a transaction at some point in the future.
financial futures contract
A _________ is a legally binding agreement to engage in a financial transaction at some point in the future.
The clearinghouse requires buyers and sellers to put up an initial deposit, called a _________.
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