fm quiz 1

a bank is solvent if

it is able to meet all demands by depositors payments

matching principal in banking

long term assets must be matched with long term liabilities and so on

the transaction cost of trading financial instruments in centralised markets is classified as

low transaction costs

mortgage loan rates tend to be

lower than other rates as they are longer term in comparison to credit cards

capital market

market in which financial capital is loaned and/or borrowed for more than one year

money market

market that trade debt and equity instruments for less than one year

forex market

market where the cash flow for a sale of a product or assets in a different currency are transacted

primary markets

markets in which corporations raise capital by issuing new securities (stocks are issued on market)

secondary markets

markets that trade financial instruments once they are issued (same stocks are then traded on market since already issued)

derivative market

markets where derivative securities are traded

the long run objective of financial management in public limited liability company is to

maximize the value of the firm's common stock

the money where securities are issued by government to obtain funds for short term is classified as:

money market instruments

A ___ would be an example of a principal, while a ____ would be an example of an agent.

shareholder, manager

market rate

aka YTM, rate of interest on a loan which is the common baseline rate on the market, borrower to lender

bonds

aka debt, a promise to pay money with interest

equity

aka stocks, carry ownership interest of a company

bank assets and liabilites:

asset: mortgage loans, credit card overdraft liabilities: deposits, savings, long term equity

callable bond

bond that can be called back by company before it matures

convertible bonds

bonds that allow bondholders to convert debt into equity shares before maturity

zero-coupon bonds

bonds that do not pay any interest rate

coupon bonds

bonds that make period payments based on the coupon rate

all financial intermiedary institutions

buy primary securities and sell secondary securities

federal funds

commercial bank deposits at Federal Reserve

in primary markets, the first time issued shares to be publicly traded is considered as:

initial public offering

if an investor has to sell a bond prior to maturity and interest rates have risen since the bond was purchased, the investor is exposed to:

interest rate risk

when maturities of liabilities and assets are mismatched, then risk is classified as:

interest rate risk

the market value size of outstanding instruments of capital markets depends on:

number of issued securities and market price of securities

YTM (market interest rate) and bond prices move in the same or opposite direction?

opposite direction

bonds valued at par, at a premium, at a discount

par means YTM (market rate) is equal to the coupon rate premium means YTM is less than the coupon rate discount means YTM is greater than coupon rate

the legal document providing information about a offering of securities is classified as:

prospectus

if instrinsic value is lower than actual value,

the bond is over valued and you should sell

if intrinsic value is higher than actual value,

the bond is undervalued and you should buy

in the equation D1/Po +g, g represents

the expected price appreciation yield from a common stock

coupon rate

the interest paid on a bond, expressed as a percentage of the bond's face value; the yield on fixed income security

if the intrinsic value of a stock is greater than its market value, is it over or under valuing the stock?

the market is undervaluing the stock

shareholder wealth in a firm is represented by:

the market price per share of the firm's common stock

interest bonds

type of bond whose intrinsic value is lesser than that of its face value