Chapter 10 - Financial Markets: Allocating Financial Resources

What is common stock?

A basic form of ownership in a corporation.

What is a callable bond?

A bond with a provision for early redemption.

What is current yield?

A bond's interest payment as a percentage of the bond's current market price rather than its par value.

What is a registration statement?

A long, complex document that firms must file with the SEC when they sell securities through a public offering

What is the stock index?

A statistic that tracks how the prices of a specific set of stocks have changed.

What is preferred stock?

A type of stock that gives its holder preference over common stockholders in terms of dividends and claims on assets.

What is a limit order?

An order telling a broker to buy a security if it is below a certain price and to only sell if it is above a certain price.

What is a market order?

An order telling a broker to buy or sell a specific security at the best currently available price.

What are the two ways in which a mutual fund can be structured?

As an open-ended or close-ended fund.

What is a convertible security?

Bonds or shares of preferred stock that investors can convert into common stock.

What are junk bonds?

Bonds that are rated Ba or lower that have a higher rate of interest. If a junk manages to turn itself around, the investor may see a substantial appreciation in the bond's price.

What is the difference between Class A and Class B stock?

Class A stock is actively traded while Class B stock is held in the hands of a few investors.

What are some things that make mutual funds popular?

Diversification, relatively low price, professional management, variety, and liquidity.

What is the primary securities market?

Is where corporations raise additional financial capital through an IPO or private placement

What is the Securities Act of 1933?

It prohibits fraud in the sale of newly issued stocks and bonds, which must first register a statement with the SEC.

What is a bond's coupon rate?

The annual interest payment as a percentage of the bond's par value.

What is the amount called that an issuer owes a bondholder at maturity?

The par value.

Define financial diversification.

The practice of holding many different securities in many different sectors.

What are market makers?

These are securities dealers that make a commitment to continuously offer to buy and sell specific NASDAQ listed stocks.

What was the Banking Act of 1933?

This law established the FDIC to insure deposits and prohibit banks from selling insurance and acting as investment banks.

What are the basic rights of common stock holders?

Voting Rights Rights to Dividends Capital Gains Pre-emptive Rights - first rights to issuance of new stock Right to Residual Claim on Assets

What are capital gains?

When the price of a stock rises above what was paid for it.

What are the most common forms of a depository institution?

A commercial bank, a credit union, or a savings and loan.

What is a savings and loan?

A depository institution that has traditionally only accepted deposits used to make mortgage loans.

What is a credit union?

A depository institution that is organized and owned by depositors.

What is the purpose of the Securities Exchange Act of 1934?

A federal law that established the SEC, regulates and oversees the security industry.

What is a securities broker?

A financial agent acting on the behalf of investors who buys and sells securities. They earn commissions and fees for the services they provide.

What is a Depository Institution?

A financial institutions that obtains funds by accepting checking and savings deposits from individuals, businesses, and other institutions, and then lending those funds to borrowers.

What is an investment bank?

A financial intermediary who specializes in helping firms raise financial capital by issuing securities through an IPO in primary markets.

What is a bond?

A formal IOU issued by a corporation or government entity.

What is a mutual fund?

A mutual fund is an investment vehicle made up of a pool of moneys collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and other assets.

What are the two methods of issuing securities in the primary market?

A public offering or a private placement

What is the Standard & Poor's 500?

A stock index that is based on the prices of 500 US corporations in various industries.

What is underwriting?

An arrangement under which an investment bank agrees to purchase all shares of a public offering at an agreed upon price.

What is the Dow Jones Industrial Average?

An index that tracks the stock of the 30 largest US corporations.

What is an institutional investor?

An investor who amasses huge pools of financial capital from various sources and uses the funds to acquire a portfolio of many different assets.

What is the stock exchange?

An organized venue for trading stocks and other securities

What is an electronic communications network?

ECNs are entirely automatized and computerized trading systems that allow traders to bypass the market makers used in the NASDAQ and OTC markets

What is an exchange traded fund?

ETFs allow investors to buy ownership in what is called a market basket of many different securities.

What are some examples of non-depository institutions?

Institutional investors, securities brokers, securities dealers, and investment bankers.

What is the secondary securities market?

Is where previously issued securities are traded.

What is a private placement?

It is when an issuing firm negotiates the terms of a securities offering directly with a small number of accredited investors.

What is the definition of Financial Markets?

Markets that transfer funds from savers to borrowers

What are some examples of institutional investors?

Mutual funds, insurance companies, and pension funds.

How many votes to Class A and Class B stockholders earn?

One vote for Class A shareholders and 10 votes for Class B shareholders

What are the three regulatory laws that were enacted after the housing crisis of the early 2000s?

Sarbanes Oxley of 2002, the Dodd-Frank Act of 2010, and the Financial Stability Oversight Council.

What is a public offering?

Securities are sold to anyone in the investing public through an IPO

What is a private offering?

Securities are sold to one or more accredited private investors

What is a securities dealer?

Securities dealers buy and sell stocks and bonds for their own accounts.

What is an accredited investor?

Someone who can invest in unregistered securities

What regulations exist in the financial markets to protect investors and improve market stability?

The Federal Reserve Act of 1913 The Banking Act of 1933 The Securities of 1933 The Securities Exchange Act of 1934 The Securities and Exchange Commission The Financial Services Modernization Act of 1999

What is the Securities and Exchange Commission or SEC?

The federal agency with primary responsibility for regulating the securities industry.

What is an IPO?

The first time a corporation sells its stock in a public offering.

What are two methods of retiring bonds?

The issuance of serial bonds or sinking funds.

Why was the Federal Reserve Act of 1913 passed?

The law stabilized the US banking system by creating the Federal Reserve after the bank panic of 1917.

What is the Financial Services Modernization Act of 1999?

The law that overturned that section of the Banking Act of 1933 that prohibited banks from selling insurance or acting like investment banks.

What is the over the counter market?

The market where securities that are not listed on exchanges are traded.

What is the name of date at which time a bond comes due?

The maturity date.

Why are financial securities market critical?

They provide corporations with financial capital and allow individual investors to build long-term wealth.