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FINN Chapter 2
The Financial System and Instruments
Terms in this set (14)
Investment banks underwrite securities to...
To earn a profit by facilitating indirect transfers of a firm's shares to investors
Most of the transfers that occur in the financial system are:
Indirect transfers using financial intermediaries or investment banks
To establish an ownership claim in a firm:
Purchase a share of the firm's stock
Net income that is not paid out as dividends becomes...
An index whose value is determined by the market value of the covered stocks is____; while an index whose value is determined by the price of the covered stocks is____;
The S&P500; The Dow
To buy a(n) ______ security, you pay a lower amount than it will be worth when it matures, whereas to buy a(n) _______ security, you pay what it is worth at maturity, plus an additional amount to compensate the investor for risk.
Select the riskiest capital market and money market security combination below.
Common stock and consumer credit
Money market instruments include all of the following except:
US Treasury bonds
A company issued 3 bonds with the same coupon and maturity date. One bond was putable, one was callable, and one had no embedded options (call this one the "normal" bond). Rank the bonds from lowest to highest price:
Callable; normal; putable
If you want a higher yield in your bond portfolio, you should buy bonds with...
lower bond ratings toward the junk bond category
Which of the following features makes MBS more risky?
The ability of mortgage owners to prepay their mortgages by paying off their existing mortgage or refinancing
Long-term, the highest risk premium has historically been associated with...
To purchase the right to sell a stock at a given price, buy:
If I want the right (not the obligation) to enter into a transaction in the future, I should buy...
a call or put-option
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