Finance Chapter 6

What is the definition of an initial public offering (IPO)?

An IPO is the first offering of financial securities by a firm to the general public.

What is a capital market instrument that represents a pool of loans and is collateralized by principal and interest cash flows?

Mortgage-backed security

Which set of characteristics best applies to a derivative security agreement?

Standardized quantity, predetermined price of exchanged asset, specified exchange date, high degree of leverage

What will increase the nominal rate of interest on a security?

-Increase in the real rate of interest -Decrease in liquidity -Addition of a call provision

Which of the following influences all financial securities?

-Inflation Premium -Real Risk-free rate

What are three key factors that limit direct investment in financial claims?

-Liquidity costs -Price risk -Monitoring costs

The Fisher effect is based on the theory that investors must be compensated for which two of the following factors?

-Premium for forgoing present consumption -Lost purchasing power on loaned funds

What are the benefits provided by secondary markets?

-Price information -Centralized marketplace -Liquidity

Foreign investors assess not only the interest rate offered on financial securities but also?

-their total wealth -their future expenditure needs -the risk on the security

Identify the sequence of events from the terrorist attacks in 2001 to the financial crisis of 2008. Start with the earliest event.

1. F 2. ID 3. I 4.M

What is the definition of a capital market?

A capital market is a market that trades securities with maturities in excess of one year.

What is a forward rate?

A forward rate is an implied rate on a short-term security that will originate sometime in the future.

What is the definition of a money market?

A money market is a market that trades securities that mature in one year or less.

How is a primary market defined?

A primary market is a market in which corporations and other fund demanders obtain funds by issuing new securities.

Which money market security is defined as short-term funds transferred between financial institutions, often for no more than one day?

Federal funds

What is the special provision that grants an issuer the right to retire a security prior to maturity?

Call option

What best illustrates a direct transfer of funds?

Corporation sale of stock directly to a shareholder

best definition of foreign exchange markets?

Foreign exchange markets are markets in which foreign currency is traded for immediate or future delivery.

What is the interest rate called that is derived from existing spot rates on similar securities with varying terms?

Forward rate

What tends to occur when financial intermediaries are provided additional liquidity?

Increased liquidity tends to lead to an expansion of the credit markets and a decline in the credit quality of loans. also lower interest rates

What key role does an investment bank play?

Investment banks arrange primary market transactions for business entities.

What is the primary benefit the issuer of a security derives from the secondary market for its securities?

Price information

Price risk is?

Price risk is the risk that an asset's value will be lower than its purchase price.

The term structure of interest rates is derived from?

Time value of money