Fina 469

The price quotations of Treasury bonds in the Wall Street Journal show a bid price of 104.5313 and an ask price of 104.5489. If you sell a Treasury bond, you expect to receive _________.

$ 1,045.31

arrears

(n.,pl.) unpaid or overdue debts; an unfinished duty

Active management style

-Believe financial markets are inefficient -actively seek misvalued securities -believe in market timing

Passive management style

-believes financial markets are efficient and fair -no attempt to find misvalued securities -no attempt to market time

If a Treasury note has a bid price of $996.25, the quoted bid price in the Wall Street Journal would be _________.

99.6250

Debt securities promise: (fixed income)

A fixed stream of income a stream of income that is determined according to a specific formula

What is the difference between a primary asset and a derivative asset?

A primary asset -are main assets of the company and lead to acquiring other assets Derivative assets -are the financial instruments who's value is derived from other assets

Competition in financial markets leads to:

A risk return trade off, which securities that offer higher expected rates of return also impose greater risks on investors

preferred stock

A special type of stock whose owners, though not generally having a say in running the company, have a claim to profits before other stockholders do.

Financial assets define:

Allocation of income among investors (cash, investments, receivables, stocks, bonds)

Equal Weighted Index

Calculated as the arithmetic average of the returns of index stocks and would be matched by the returns on a portfolio that had equal dollar amounts invested in each index stock. w(i) = 1/N

Asset classes

Common Stock, Derivative Securities, Fixed Income Securities

Sarbanes-Oxley Act tightened corporate governance by requiring:

Corporations have more independent directors The CFO personally vouch for the corps financial statements The creation of a new board to oversee the auditing of public companies

Corporate debentures are backed by: A. real estate B. equipment C. portfolio of marketable securities D. full faith and credit

D. full faith and credit Debentures are backed solely by the full faith and credit of the issuer. Debentures are usually issued by "Blue Chip" organizations with high credit ratings or lower credit rated companies in the form of high yield or "junk" bonds.

Which of the following are financial assets? Debt securities Equity securities Derivative securities

Debt securities Equity securities Derivative securities

Competition among security analysts results in:

Financial markets that are nearly informationally efficient, making sure prices reflect all available information

Active trading in markets and competition among securities analysts helps ensure that: I. Security prices approach informational efficiency. II. Riskier securities are priced to offer higher potential returns. III. Investors are unlikely to be able to consistently find under- or overvalued securities.

I. Security prices approach informational efficiency. II. Riskier securities are priced to offer higher potential returns. III. Investors are unlikely to be able to consistently find under- or overvalued securities.

Three stocks have share prices of $12, $75, and $30 with total market values of $400 million, $350 million, and $150 million, respectively. If you were to construct a price-weighted index of the three stocks, what would be the index value?

Index = (12 + 75 + 30)/3 = 39

Real assets are:

Land, buildings, equipment, and knowledge that can be used to produce goods and services

Investment bankers provide service to:

Large corporations Institutional investors

venture capital

Money invested in new or emerging companies that are perceived as having great profit potential

venture capital

Money that is invested in new or emerging companies that are perceived as having great profit potential

Hedge funds are

Open to institutional investors Open to wealthy individuals

Common dividends cannot be paid if:

Preferred dividends are in arrears on cumulative preferred stock

Real Assets vs Financial Assets

Real: Assets used to produce goods and services. Financial: Claims on real assets or the income generated by them.

Commercial paper is a

Short term security issues by (large well known companies) to raise funds

Commercial bankers provide service to:

Small and medium sized businesses/consumers and accept deposits, make loans, safeguard assets

Financial assets are:

Stocks and bonds, securities

What do financial intermediaries do?

Take funds from lenders (investors) and give them to borrowers (firms) to earn a return.

common stock

Term used to describe the total amount paid in by stockholders for the shares they purchase.

Give an example that describes the purpose of derivatives market

Transferring risk from one party to another

TIPS are ______.

Treasury bonds that protect investors from inflation

What are mechanisms for mitigating agency problems?

Tying income of managers to success of the firm

derivatives market

a market that includes exchange trading (for futures and some options) and over-the-counter trading (for all other derivatives, at least currently)

stock market index

a measure of the performance of a group of stocks that represent the market or a sector of the market

Currently, the Dow Jones Industrial Average is computed by _________.

adding the prices of 30 large "blue-chip" stocks and dividing by a divisor adjusted for stock splits and large stock dividends

Leveraged Buyout (LBO)

an attempt by employees, management, or a group of investors to purchase an organization primarily through borrowing (usually distressed firms)

security analysis

analysis of the value of securities

Security selection refers to the ________.

choice of specific securities within each asset class

Financial markets allow:

companies, governments, and individuals to increase their utility

Money Market Securities

debt instruments or securities with maturities of ONE YEAR OR LESS

common dividends

dividends paid to common stockholders

preferred dividends

dividends paid to preferred stockholders

Dividends

earnings distributed to stockholders

Derivative Securities

financial contracts whose values are derived from the values of underlying assets

financial intermediaries

firms such as banks, mutual funds, pension funds, insurance companies, Credit union that borrow funds from savers and lend them to borrowers

Private Equity

investments in companies that are not traded on a stock exchange

primary market

market for selling financial assets that can only be redeemed by the original holder (IPO, SEO)

Real assets generate:

net income to the economy

debt securities

notes and bonds that pay interest and have a fixed maturity date

Suppose an investor is considering one of two investments that are identical in all respects except for risk. If the investor anticipates a fair return for the risk of the security he invests in, he can expect to _____ .

pay less for the security that has higher risk

asset allocation

portfolio choice among broad investment classes

secondary market

preexisting securities traded among investors (NYSE, NASDAQ)

The material wealth of society is determined by the economy's _________, which is a function of the economy's _________.

productive capacity; real assets

T-bills (treasury bills)

short-term debt obligations the U.S. government sells to raise money Sell in denominations of 10,000 Income earned on them is exempt from STATE and LOCAL TAXES

Investment bankers:

specialists who assist in the issue and sale of new securities in the primary market

value-weighted index

stock market index in which stocks are held in proportion to the aggregate market value of the companies in the index

Price Weighted Index

stock market index in which stocks are held in proportion to their share price

risk-return trade-off

the greater the risk a lender takes in making a loan, the higher the interest rate required

Bid price

the price a dealer is willing to pay for a security

ask price

the price at which a dealer or other trader will sell a security

Securitzation

the process of transforming loans or other financial assets into securities

Call price

the stated price at which a bond may be repurchased, by use of a call feature, prior to maturity

Money market securities are sometimes referred to as cash equivalents because _____.

they are safe, marketable, and offer low returns

Corporate convertible bonds are:

those that can be exchanged back for a specific number of company's common shares / cash

In a ___ index, changes in value of the stock with the greatest market value will move the index value the most; everything else equal

value-weighted index