Quiz 1 - Ch 1-3
You purchased 200 shares of ABC common stock on margin at $50 per share. Assume the initial margin is 50% and the maintenance margin is 30%. You will get a margin call if the stock drops below ________. (Assume the stock pays no dividends and ignore interest on the margin loan.) Answers: $26.55 $35.71 $28.95 $30.77
$35.71 Response Feedback: .3=(200P-5000)/200P, P=35.17
Treasury Notes
(2-10 years) Semi-annual coupon bonds issued in maturities of 2, 5, 10 or 30 years usually with $1,000 par value
Treasury Bonds
(> 10 years) Semi-annual coupon bonds issued in maturities of 2, 5, 10 or 30 years usually with $1,000 par value
proxy contest
(i.e., rights to vote the shares of other shareholders) to take control of the firm and vote in another board.
What is insider trading?
* Regulations prohibit anyone from transacting in securities to profit from inside information. * Inside information is nonpublic knowledge about a company possessed by corporate officers, major owners, or others with privileged access
TIPS
Par value adjusted semiannually to the CPI, fixing real returns (the only risk-free real return); treasury inflation protected securities
Insures bank accounts in event of bank failure up to $100,000
Federal Depository Insurance Corporation (FDIC)
Municipals
Federal and local tax exempt, some credit risk, lower pre-tax yields
Non-government organization to self-regulate trading practices of brokerage firms and certify brokers
Financial Industry Regulatory Authority (FINRA)
Investment companies
Firms managing funds for investors. An investment company may manage several mutual funds
investment bankers
Firms specializing in the sale of new securities to the public, typically by underwriting the issue.
three major players in the financial markets
Firms, Households, Government
Saving Bonds
Fixed Rate, interest accrues and is received when redeemed
Fixed-income or debt securities
Pay a specified cash flow over a specific period
securitization
Pooling loans into standardized securities backed by those loans, which can then be traded like any other security
secondary market
Previously issued securities are traded among investors
What is short selling?
Profit from decline in stock price Borrow security from broker and sell it, deposit proceeds with margin in an account Buy back security at a lower price and return it to the broker Liable for dividend amount to original owner "Uptick rule" - can only short a stock if most recent move was up (or flat preceded by an uptick) per Federal Reserve Bank
Federal funds
Funds in the accounts of commercial banks at the Federal Reserve Bank
Example of STRIPS
Two year treasury notes cash flows
If the same company creates new stock at a later date to sell to the public
What is a SEO (Seasoned Equity Offering)?
are loans stock brokers take out to lend to customer so they can buy stocks on margin
What is a broker's call?
is a right to purchase an asset at a stipulated exercise price on or before an expiration date.
What is a call option?
is an ownership share in a corporation. Each share entitles its owner to one vote on matters of corporate governance and to a prorated share of the dividends paid to shareholders. Stock, or equity, owners are the residual claimants on the income earned by the firm.
What is a common stock?
Fixed Income
What is a form of debt or loans with fixed payment schedules, while equities are shares of ownership in companies with unknown payoffs?
is an obligation to buy or sell an asset at a stipulated futures price on a maturity date.
What is a futures contract?
means that the most shareholders can lose in event of the failure of the corporation is their original investment.
What is a limited liability?
usually pays a fixed stream of dividends for the life of the firm: It is a perpetuity. A firm's failure to pay the dividend due on preferred stock, however, does not set off corporate bankruptcy. Instead, unpaid dividends simply cumulate. Varieties of preferred stock include convertible and adjustable-rate issues.
What is a preferred stock?
are when the investment bank finds just a few large investors to buy the financial securities instead of trying to sell the securities to the public. Private placements are popular for debt securities and require less documentation with the SEC, but might result in a lower price compared to IPO's
What is a private placement?
is the right to sell an asset at some exercise price. Calls increase in value, while puts decrease in value, as the price of the underlying asset increases
What is a put option?
means stockholders are the last in line of all those who have a claim on the assets and income of the corporation
What is a residual claim?
when they sell stock for the first time to the public
What is an IPO (Initial Public Offering)?
are large denomination negotiable time deposits issued by commercial banks and thrift institutions
What is considered Certificates of Deposits (CDs)
Currencies Commodities Real estate Private equity Hedge funds Collectibles
What is considered alternative investments?
Real estate commodities intellectual property which is used to produce goods and serivices
What is considered as physical assets?
Treasury -bills (money Market)
Zero coupon bond issued in maturities of 4, 13, 26 or 52 weeks
STRIPS
Zero coupon bonds created by selling each payment of a T-note or T-bond, Yield to maturity = spot rate; STRIPS = separate trading of registered interest and principle securities
Firms
___ are net demanders of capital. They raise capital now to pay for investments in plant and equipment. The income generated by those real assets provides the returns to investors who purchase the securities issued by the firm.
Governments
____ can be borrowers or lenders, depending on the relationship between tax revenue and government expenditures. Since World War II, the U.S. government typically has run budget deficits, meaning that its tax receipts have been less than its expenditures
Households
____ typically are suppliers of capital. They purchase the securities issued by firms that need to raise funds
Who does the financial intermediaries bring together?
bring together suppliers of capital (investors) and demanders of capital (firms and governments) within the financial markets
What are brokered markets?
have brokers who serve as experts and help customers. Real estate is an example. Brokers earn a fee typically. The Primary financial market is another example of a brokered market
fixed-income capital market
includes long-term securities such as Treasury bonds, as well as bonds issued by federal agencies, state and local municipalities, and corporations. These bonds range from very safe in terms of default risk (for example, Treasury securities) to relatively risky (for example, high-yield or "junk" bonds).
Commercial paper is a short-term security issued by __________ to raise funds. Answers: the Federal Reserve credit union banks large well-known companies the New York Stock Exchange
large well-known companies
What is a direct dealer?
least organized of markets and include direct buyer to seller contact. An example might be if you buy a used refrigerator from a advertisement another person put in the newspaper or craigslist
bid price
lightly lower price you would receive if you wanted to sell a bill to a dealer.
An order to buy or sell a security at the best available price is a ______________. Answers: limit order market order stop loss order stop buy order
market order
Diversification
means that many assets are held in the portfolio so that the exposure to any particular asset is limited.
What are auction markets?
need a high volume of trading, so stocks listed on auction markets like the New York Stock Exchange must have a minimum trading volume or be delisted. Traders agree on prices together and do not have to search dealers for the best price
money market
refers to fixed-income securities that are short term, highly marketable, and generally of very low risk. Examples of money market securities are U.S. Treasury bills or bank certificates of deposit (CDs).
bank-discount method.
the bill's discount from its maturity, or face, value is "annualized" based on a 360-day year and then reported as a percentage of face value
bid-asked spread
the difference in these prices, which is the dealer's source of profit
asked price
the price you would have to pay to buy a T-bill from a securities dealer.
Money market securities are sometimes referred to as "cash equivalent" because _____. Answers: they are safe and marketable they are not liquid they are high risk they are low denomination
they are safe and marketable
Order Transaction Quiz Given a stock quote of Bid: 21.25 and Ask: 21.625 Is it likely that your order below will be accepted? If it is accepted, what will be the price? 1. Market order to buy ________ 2. Market order to sell ________ 3. Limit order to buy at 21.50 or less _______ 4. Limit order to sell at 21.50 or higher _______ 5. Limit order (outside the spread) to buy at 21 or less ______ 6. Limit order (outside the spread) to sell at 21.75 or more ______ 7. Stop-loss order at 19 ______ 8. Stop-buy order at 25 ______
1. If placed a market order to buy, what price would you pay? (21.625) 2. If placed a market order to sell, what price would you pay? (21.25) 3. Limit orders are orders to buy or sell a security when it goes above or below a certain price 4. Limit orders trading inside the spread ... orders at 21.50 bump into each other and agree to trade inside.. Both parties are better off. 5. Limit orders outside the spread ... place a limit order to buy at 21. Will it execute? No, dealers willing to sell at 21.625. 6. Stop-buy and stop loss orders are similar to limit orders except they are used when you already have a position 7. Stop-loss is an order to sell existing stock when price falls below a limit 8. Stop-buy is an order to "cover your short position and buy back the stock if the price goes above a certain limit.
certificate of deposit (CD)
A bank time deposit.
primary market
A market in which new issues of securities are offered to the public; banks are called underwriters
derivative asset
A security with a payoff that depends on the prices of other securities.
Assume you owned a stock that is currently trading at $50/share and if the price ever reaches $45/share you want to sell it. Instead of waiting for the price to drop to $45 and then placing a sell order, you can place a stop loss order now to sell the stock for you automatically in the future if it ever reaches $45
A stop buy order is placed now to automatically buy a stock in the future if the price ever increases to a certain level. Stop buy orders typically accompany an existing short position in a stock
Fannie Mae.
Agency and Government-Sponsored Enterprises (GSE), higher yields
asset allocation
Allocation of an investment portfolio across broad asset classes.
price-weighted average
An average computed by adding the prices of the stocks and dividing by a "divisor."
equally weighted indexes
An index computed from a simple average of returns
bankers' acceptance
An order to a bank by a customer to pay a sum of money at a future date.
debt securities, common stock, or equity
An ownership share in a corporation
Security analysis
Analysis of the value of securities. involves the valuation of particular securities that might be included in the portfolio. For example, an investor might ask whether Merck or Pfizer is more attractively priced. Both bonds and stocks must be evaluated for investment attractiveness, but valuation is far more difficult for stocks because a stock's performance usually is far more sensitive to the condition of the issuing firm.
Equivalent taxable yield Formula
Equivalent taxable yield Formula
Federal bonds are taxed at federal level but not state and local levels
Are federal bonds taxed?
- Patent - Real (intellectual property) - Lease obligation - Financial (Contract) - Customer Goodwill - Real - College Education - Real (Human capital) - $5 - Financial (claim on country)
Are the following real or financial assets? - Patents - Lease obligation - Customer goodwill - College Education - $5 bill
real assets
Assets used to produce goods and services.
risk-return trade-off
Assets with higher expected returns entail greater risk
Active management
Attempting to identify mispriced securities or to forecast broad market trends.
- Saving for future consumption - Borrowing for present consumption - Provide information - Raising capital for businesses - Allocation of capital to best uses - Sharing of risks - Separation of ownership and management
Benefits of financial markets are?
What does it mean to buy on margin?
Buy security with partial loan from broker. Allows investors to leverage their money Initial margin is the minimum % of trade value that you invest with your own money (amount of money you put up) Margin is the net worth of investors trade and changes as stock price changes The margin is similar to your down payment on a home with the rest of the purchase price being financed. Current initial margin is 50% set by the federal reserve bank
Passive management
Buying and holding a diversified portfolio without attempting to identify mispriced securities.
Non-government organization to self-regulate practices of investment management professionals
Chartered Financial Analyst (CFA) Institute
security selection
Choice of specific securities within each asset class
financial assets
Claims on real assets or the income generated by them.
What are the types of transaction costs?
Commission: Fee paid to broker Spread: Difference between the Bid and Ask prices is essentially a cost you pay when you buy and sell Taxes
Investment
Commitment of current resources in the expectation of deriving greater resources in the future.
Physical assets include all but which one of the following? Common stock Land Buildings Consumer durables
Common stock
potential conflicts of interest are called agency problems
Conflicts of interest between managers and stockholders; because managers, who are hired as agents of the shareholders, may pursue their own interests instead
financial intermediaries
Corporations and governments do not sell all or even most of their securities directly to individuals. For example, about half of all stock is held by large financial institutions such as pension funds, mutual funds, insurance companies, and banks. These financial institutions stand between the security issuer (the firm) and the ultimate owner of the security (the individual investor).
Assume you purchased 500 shares of XYZ common stock on margin at $40 per share from your broker. If the initial margin is 60%, the amount you borrowed from the broker is _________. Answers: $20,000 $12,000 $8,000 $15,000
Correct $8,000 Response Feedback: 500($40)(1-0.60) = $8,000
Which one of the following is a true statement regarding corporate bonds? Answers: A corporate callable bond gives its holder the right to exchange it for a specified number of the company's common shares A corporate debenture is a secured bond A corporate convertible bond gives its holder the right to exchange it for a specified number of the company's common shares Holders of corporate bonds have voting rights in the company
Correct A corporate convertible bond gives its holder the right to exchange it for a specified number of the company's common shares
Which of the following is not a true statement regarding municipal bonds? Answers: A municipal bond is a debt obligation issued by state or local governments. A municipal bond is a debt obligation issued by the Federal Government. The interest income from a municipal bond is exempt from federal income taxation. The interest income from a municipal bond is exempt from state and local taxation in the issuing state.
Correct A municipal bond is a debt obligation issued by the Federal Government.
Which of the following are financial assets? I. Debt securities II. Equity securities III. Derivative securities I only I and II only II and III only I, II and III
Correct I, II and III
Which of the following is not a characteristic of a money market instrument? Answers: Liquidity Marketability Low risk Maturity greater than one year
Correct Maturity greater than one year
Which of the following is not a money market instrument? Treasury bill Commercial paper Preferred stock Banker's acceptance
Correct Preferred stock
TIPS are ______. Answers: Treasury bonds that pay a variable rate of interest U.K. bonds that protect investors from default risk securities that trade on the Toronto stock index Treasury bonds that protect investors from inflation
Correct Treasury bonds that protect investors from inflation
An investor in a T-bill earns interest by _________. Answers: receiving interest payments every 90 days receiving dividend payments every 30 days converting the T-bill at maturity into a higher valued T-note buying the bill at a discount from the face value received at maturity
Correct buying the bill at a discount from the face value received at maturity
Purchases of new issues of stock take place _________. Answers: at the desk of the Fed in the primary market in the secondary market in the money markets
Correct in the primary market
Underwriting is one of the services provided by _____. Answers: the SEC investment bankers publicly traded companies FDIC
Correct investment bankers
Preferred stock is like long-term debt in that ___________. Answers: it gives the holder voting power regarding the firm's management it promises to pay to its holder a fixed stream of income each year the preferred dividend is a tax-deductible expense for the firm in the event of bankruptcy preferred stock has equal status with debt
Correct it promises to pay to its holder a fixed stream of income each year
You purchased XYZ stock at $50 per share. The stock is currently selling at $75 and you would like to submit an order now to sell the stock if it ever goes down to $60. You thus place a _________ at $60 Answers: limit-buy order limit-sell order market order stop-loss order
Correct stop-loss order
Under firm commitment underwriting the ______ assumes the full risk that the shares cannot be sold to the public at the stipulated offering price. Answers: red herring issuing company initial stockholder underwriter
Correct underwriter
Cutoff Tax Rate Formula
Cutoff Tax Rate Formula
Who are the secondary markets?
Dealer markets: Over-the-counter (OTC), National Association of Securities Dealers Automatic Quotation System (NASDAQ) Dealers post bid-ask prices and profit from the difference Auction markets: ECN's automatically link buyer and sellers when order prices match New York Stock Exchange (NYSE) Brokers charge customers a fee to trade securities Specialists manage trading in each security and act as brokers and dealers: As a broker they execute other brokers orders, As a dealer to fill orders when no buyers or sellers exist, Purpose of specialists is to ensure liquid markets for each security
What are dealers?
Dealers buy and sell particular products for their own inventory. They advertise their buy and sell (bid and ask) prices and profit from the difference between their buy and sell prices. Cars and the over-the-counter financial markets are an example
Treasury notes or bonds
Debt obligations of the federal government with original maturities of one year or more
What types of markets are there?
Direct search: Least organized, person to person Broker: Broker helps buyer and sellers, Do not typically buy and sell for their own account, Primary markets Dealer: Higher trading volume, Dealers buy and sell particular products and post buy-sell prices, National Association of Securities Dealer Automated Quotation System (NASDAQ) Auction: Most organized type of market, needs very high trading volume, Traders meet to agree on price, New York Stock Exchange (NYSE)
Eurodollars
Dollar-denominated deposits at foreign banks or foreign branches of American banks.
liabilities of the issuers of the securities
Household wealth includes financial assets such as bank accounts, corporate stock, or bonds. However, these securities, which are financial assets of households, are
distinguished largely by their tax-exempt status. Interest payments (but not capital gains) on these securities are exempt from income taxes.
How are municipal bonds distinguished?
categorized as either real or financial
How can assets be invested?
Physical and financial assets
How can assets be separated as?
limited by transparency that allows traders and investors to assess the risk of their counterparties, capital requirements to prevent trading participants from being brought down by potential losses, frequent settlement of gains or losses to prevent losses from accumulating beyond an institution's ability to bear them, incentives to discourage excessive risk taking, and accurate and unbiased analysis by those charged with evaluating security risk.
How can systematic risk be limited?
Federal funds rate.
In the Federal funds market, banks with excess funds lend to those with a shortage. These loans, which are usually overnight transactions, are arranged at a rate of interest called the ____
Money Markets
Include short-term, highly liquid, and relatively low-risk debt instruments.
market value-weighted index
Index return equals the weighted average of the returns of each component security, with weights proportional to outstanding market value.
hedge funds
Individuals that pool and invest the money of many clients. But they are open only to institutional investors such as pension funds, endowment funds, or wealthy individuals. They are more likely to pursue complex and higher-risk strategies. They typically keep a portion of trading profits as part of their fees, whereas mutual funds charge a fixed percentage of assets under management.
What is the short sale margin?
Initial margin required to make trade Maintenance margin required Margin call if margin falls below maintenance margin
financial intermediaries Definition
Institutions that "connect" borrowers and lenders by accepting funds from lenders and loaning funds to borrowers.
private equity
Investments in companies that are not traded on a stock exchange.
London Interbank Offer Rate (LIBOR)
Lending rate among banks in the London market
What are limit orders?
Limit buy and limit sell orders Try to trade at better than the market price Try to sell for higher than current market bid price Try to buy for lower than current market ask price
Common stocks, also known as equity securities, or equities,
Ownership shares in a publicly held corporation. Shareholders have voting rights and may receive dividends.
Corporate bonds
Long-term debt issued by private corporations typically paying semiannual coupons and returning the face value of the bond at maturity.
What are market orders?
Market buy and market sell Trade at the market price Buy at market quoted Ask price (offer price) Sell at market quoted Bid price
venture capital (VC)
Money invested to finance a new firm. Sources of venture capital are dedicated venture capital funds, wealthy individuals known as angel investors, and institutions such as pension funds.
Treasury Bills
Most marketable of all money market instruments. T-bills represent the simplest form of borrowing. Short-term government securities issued at a discount from face value and returning the face amount at maturity.
Preferred stock
Nonvoting shares in a corporation, usually paying a fixed stream of dividends.
futures contract
Obliges traders to purchase or sell an asset at an agreed upon price at a specified future date. calls for delivery of an asset (or, in some cases, its cash value) at a specified delivery or maturity date, for an agreed-upon price, called the futures price, to be paid at contract maturity.
Selective disclosure of material information by public companies
Regulation FD (full disclosure)
systemic risk definition
Risk of breakdown in the financial system, particularly due to spillover effects from one market into others
Stock analysts must disclose conflicts of interest Misleading financial statements
Sarbanes-Oxley Act
Market Regulation: New securities must fully disclose all relevant information
Securities Act of 1933
Market Regulation: Existing firms with securities must periodically disclose relevant financial information Established Securities and Exchange Commission (SEC): Register and regulate securities exchanges, OTC trading, brokers and dealers Commodities Futures Trading Commission (CFTC) regulates futures markets Federal reserve bank sets margin requirements
Securities Exchange Act of 1934
Insures brokerage accounts in event of broker failure up to $500,000
Securities Investor Protection Corporation (SIPC)
derivative securities such as options and futures
Securities providing payoffs that depend on the values of other assets
What is the short selling process?
Short Sell
repurchase agreements, also called repos, or RPs,
Short-term sales of government securities with an agreement to repurchase the securities at a higher price
commercial paper
Short-term unsecured debt issued by large corporations
Questions: What type of markets do new cars sell in? What type of markets do used cars sell in?
Some products like used cars sell in multiple markets. New cars typically sell in dealer based markets while used can sell in direct, dealer or auction type markets.
Order Type Quiz You plan to buy a car in one month and will sell your Intel stock for the down payment. You plan to hold onto the stock for the month since you think it's price will go up, but if it goes down you will no longer be able to afford the car. What type of order could you place now to protect yourself?
Stop Loss order
What are stop orders?
Stop loss (stop sell) and stop buy orders Not intended for immediate trades An order placed with the broker that only gets submitted to the market in case the market price reaches a certain point Designed to automatically limit losses on existing trades
municipal bonds
Tax-exempt bonds issued by state and local governments
modern portfolio theory
The effect of diversification on portfolio risk, the implications for the proper measurement of risk, and the risk-return relationship are the topics of Part Two. The development of this theory brought two of its pioneers, Harry Markowitz and William Sharpe, Nobel Prizes.
systemic risk
The financial crisis of 2008 illustrated in a painful way the intimate ties between these two sectors. We present in this section a capsule summary of the crisis, attempting to draw some lessons about the role of the financial system as well as the causes and consequences
premium
The purchase price of an option
call option
The right to buy an asset at a specified price on or before a specified expiration date; gives its holder the right to purchase an asset for a specified price, called the exercise or strike price, on or before some specified expiration date
put option
The right to sell an asset at a specified exercise price on or before a specified expiration date. gives its holder the right to sell an asset for a specified exercise price on or before a specified expiration date.
American depository receipts (ADR's) Certificates traded in US markets that represent ownership in shares of international companies Easier for US citizens to invest in international companies
What are Depository Receipts?
Issued in another country's currency Issuer bears currency risks Eurodollar bonds, Euroyen bond, Etc
What are Eurobonds
are deposits of large commercial banks at the federal reserve bank
What are Federal funds?
Issued in own currency Foreign investors bear currency risks
What are International Bonds?
Sold by foreign companies in local markets and currencies
What are Yankee bond, Samurai bond?
are typically used to finance international transactions in goods and services
What are banker's acceptances?
- pays a premium for the option to buy the underlying asset at agreed on exercise price (or strike price) within a set period of time. - If the market price never rises to the exercise price, the call option expires worthless - market price exceeds the exercise price, the option holder can exercise the option and receive a profit equal to the difference between the market price and the exercise price - Call option owners profit when the stock price rises
What are call option contracts?
Callable bonds allow firm to payback loan early (buyback bonds at a certain price after a certain date in the future).
What are callable bonds?
gives the firm the option to repurchase the bond from the holder at a stipulated call price
What are callable bonds?
Financial Assets
What are claims on real assets or the income they generate?
Voting rights, share of dividends, limited liability Residual claim in case of bankruptcy
What are common shares of stock?
Convertible bonds may be exchanged for another asset (usually company stock)
What are convertible bonds?
gives the bondholder the option to convert each bond into a stipulated number of shares of stock
What are convertible bonds?
Often riskier because a company may not payback the loan (default) Secured bonds versus debentures Call and convertibility features
What are corporate bonds?
Provide insurance for investors in MBS's or CDO's or other bonds in case of a credit event Unregulated market meaning sellers of CDS's (those selling bond insurance) like AIG not required to have collateral
What are credit default swaps? CDS
Agreement between traders to do something in the future. Value derived from underlying asset: commodity, security, index, currencies Settlement: Physical: underlying asset delivered; Cash: cash is delivered Contract types: Physical or financial based on underlying asset
What are derivatives?
Currencies Commodities: Physical assets, indirect through companies, or derivatives Real estate :Physical assets or Real Estate Investment Trusts (REIT's) Private equity: Leverage buy-out or venture capital funds, qualified investors Hedge funds: Few trading restrictions, qualified investors only Collectibles: Art, stamps, coins, antiques, ...
What are different types of alternative investments?
Derivatives
What are financial instruments whose value is based on the value of some other instrument
- Sellers agree to supply an asset or its cash value at a specified delivery date - Buyers agree to purchase the asset on the delivery date for an agreed on price Futures contracts are entered into without cost (no initial premium unlike option contracts)
What are future contracts?
are very short-term debt obligations. They are usually highly marketable and have relatively low credit risk. Their low maturities and low credit risk ensure minimal capital gains or losses. These securities often trade in large denominations, but they may be purchased indirectly through money market funds.
What are money market securities?
. The bond is backed by a pool of mortgages that are being paid by homeowners. Each month a homeowner makes a payment, a piece of that payment is sent to all the owners of the bonds. If one were to buy a Mortgage Backed Security (MBS) they would receive an interest payment and a partial repayment of their principal (since some of a homeowners payment is interest and principal). These securities are issued by Fannie Mae, Freddie Mac and Ginnie Mae - but can also be issued by other institutions Mortgages grouped together (pooled) Shares in pool of mortgages sold to investors as bonds Developed to increase liquidity of banks
What are mortgage backed securities?
are pools of mortgages sold in one package
What are mortgage pass-through securities?
either an ownership claim in a pool of mortgages or an obligation that is secured by such a pool
What are mortgage-backed securities?
Bond name and maturity Coupon rate Price quoted as percent of par value Bid - what you sell for Ask - what you buy for Yield - YTM if you buy at ask
What are on the Bond Quote Listing?
Preferred shares are a hybrid security really - part equity and part debt - if dividend payments are suspended they accumulate. Later company must pay all accumulated dividends to preferred share owners before they can pay common share owners. Corporate investors do not pay full tax on preferred share dividends Non-voting, may be redeemable or convertible Fixed dividends that may be suspended Priority over common stock Corporate owners not pay taxes on 70% of dividends
What are preferred stock?
- pays a premium for the option to sell the underlying asset at an agreed on exercise price (or strike price) within a set period of time - market price never falls to the exercise price, the put option expires worthless - market price is lower than the exercise price, the option holder can exercise the option and receive a profit equal to the difference between the market price and the exercise price - Put option owners profit when the stock price drops
What are put option contracts?
used by banks or government debt dealers to raise short term cash by selling government securities and agreeing to buy them back later at a given price
What are repurchase agreements used for?
- easier for buyers to find sellers and investors to find investment opportunities, which simplifies and lowers the cost of investing, trading, saving for the future, and borrowing for the present. - provide investors with information like interest rates and cost of equity through a process called price discovery where investors bid for financial securities - make it easier for businesses to raise capital through a separation of management and ownership and thus limited liability for ownership - allow our money to flow to business that can make the best use of it - easier to manage risk by getting insurance from insurance companies or locking in commodity prices on commodity markets for those that buy commodities.
What are some benefits of financial markets?
- Board of directors - Compensation Plans to align goals of managers and shareholders by using performance bonuses and stock options - large shareholders - Financial Markets through the threat of takeover - accounting auditors - government laws - ability for shareholders to sue firms corporate takovers - Shareholder pressure on management
What are some techniques to prevent agency problems?
Fixed income debt securities Treasury notes and bonds Separately traded, registered interest and principal securities (STRIPS) Treasury inflation protected securities (TIPS) Federal agency debt Municipal bonds
What are some types of Bond Market?
- fixed income (debt) securities - equity securities - derivative securities
What are some types of financial Assets?
- Commercial banks - insurance companies - investment banks (primary markets) - stock brokerages (secondary markets) - Investment companies (mutual funds, hedge funds, venture capital funds, private equity fund)
What are some types of financial intermediaries?
Tangible: corn, oil, buildings, machinery, etc Intangible: intellectual property, patents, goodwill, etc.
What are some types of real assets?
firms and governments raise cash by issuing new financial securities; Invest cash to buy financial assets of issuers
What are the primary financial markets?
US indexes: New York Stock Exchange (NYSE), NASDAQ, Wilshire 5000 International indexes: Shanghai stock exchange composite index (SSEC), RTS, FTSE ("footsie"), DAX, Hang Seng, Nikkei, MSCI Barra (All Regions and countries)
What are types of Stock Market Indexes?
debentures
What are unsecured bonds with no collateral
fixed-income (debt), equity, or derivative instruments.
What can Financial assets can be categorized as?
Real Assets.
What creates real wealth?
pool investor funds and invest them. Their services are in demand because small investors cannot efficiently gather information, diversify, and monitor portfolios. The financial intermediary, in contrast, is a large investor that can take advantage of scale economies.
What do financial intermediaries do?
Advise issuers on security type, features, offer price and timing Private placement of equity or debt to limited number of qualified investors Public equity and debt offerings Equity via Initial Public Offering (IPO) or Seasoned Equity Offering (SEO) Play the middleman role of connecting the issuer with investors who buy the financial securities
What do investment banks do?
take money from investors and either loan or invest the money with other investors, firms or governments. Investment banks specialize in creating new financial securities for firms and selling them in the primary markets to investors.
What do the financial intermediaries do?
in financial markets that are nearly informationally efficient, meaning that prices reflect all available information concerning the value of the security
What does the Competition among security analysts result to?
a risk-return trade-off, in which securities that offer higher expected rates of return also impose greater risks on investors
What does the Competition in financial markets lead to?
Municipals.
What does the State or Local gov't issue?
he asset allocation decision—the allocation of funds across broad asset classes—and then progress to more specific security-selection decisions.
What does the Top-down portfolio construction techniques start with?
Fannie Mae
What does the U.S. Federal Agencies issue?
- T-bills (money market) - Treasury notes (2-10 years) - Treasury bonds (>10 years) - STRIPS - TIPS - Saving Bonds
What does the US Federal government issue?
brings efficiency to corporate fund raising. Investment bankers develop expertise in pricing new issues and in marketing them to investors
What does the investment banking bring?
implies that actual returns can differ considerably from expected returns at the beginning of the investment period.
What does the presence of risk imply?
Treasury bonds and notes. These are coupon-paying bonds usually issued at or near par value. Treasury bonds are similar in design to coupon-paying corporate bonds.
What for is much of the US government borrowing from?
- Corporate Governance - Financial Markets and Institutions - Derivatives and Risk Management - International
What four other areas of study that cross-over between corporate finance and investments?
Eurodollars are US dollar deposits in banks outside the US
What is a Eurodollar?
are used to produce goods and services. Some real assets like corn, oil, metals, land, buildings, and machinery are tangible in that you can physically touch them, while other real assets like patents, goodwill, and knowledge are intangible in that you can not touch them but they can still be used to produce products.
What is considered as real assets?
- Savings and checkings - Money Market securities: T-bills, CDs, Commercial Papers, others
What is considered cash equivalents?
is short term unsecured promissory notes issued by both financial and non-financial corporations.
What is considered commercial paper?
- Common stock - preferred stock - int. common stock - depository receipts
What is considered equities?
securities or contracts Cash Fixed Income Equities
What is considered financial assets?
- Treasury bonds - Treasury inflation protected securities - Federal agency bonds - Muni bonds - Corp bonds - Int. bonds - Asset-backed securites
What is considered fixed income?
where investors bid for financial securities
What is price discovery?
30 large companies picked to represent the market since 1896 Computed using the price-weighted method
What is the Dow Jones Industrial Average?
Considered safe and highly liquid, easy to sell Maturity equal to or less than 1 year many types of securities Usually invest in treasury bills, commercial paper, Eurodollars Repurchase Agreements Broker's calls Federal funds Banker's Acceptance
What is the Money Market?
500 companies Computed using the market value-weighted method
What is the S&P 500?
Represent the conflict of interest between principals (shareholders or investors) and agents (management) and is caused by separation of ownership and control
What is the definition of agency problems? Which category does this fall into?
The Dow Jones averages, the oldest and best-known indicators, are price-weighted indexes
What is the oldest and best-known indicators?
What is the process of Investment?
What is the process of Investment?
Corporate governance
What is the solution for agency problems?
Competition in financial markets
What leads to a risk-return trade-off, in which securities that offer higher expected rates of return also impose greater risks on investors.
Financial Assets.
What represents claims to parts or all of that wealth and what determines how the ownership of real assets is distributed among investors?
If the purchase was for a tax-exempt retirement account, the corporate bond is preferred because the coupon is higher. But, if the purchase is not tax-exempt in a personal account, the decision should be made on an after-tax basis. Thus you must calculate an equivalent taxable yield.
Which bond would you rather buy? A taxable bond paying an annual coupon interest of 8% A tax-free municipal bond paying an annual coupon interest of 5%
What is the IPO Process?
While IPO's get a lot of media attention, 90% of venture capital-backed private firms choose selling to a public company instead of going public. Since it is much easier and IPO markets fluctuate a lot.
Represent investors and work directly with management to approve corporate actions like mergers
Who are the board directors?
Private firms Public firms Governments Issue new financial securities Raise cash for many potential purposes including investment in real assets
Who are the issuers?
Financial Markets
Who is the backbone of our financial system. It is where companies and investors meet to get financing or to invest money. This is also been the topic of much political debate here in the US
International Finance
Who looks at how corporate finance and investment rules and methods vary when we might be moving money or investments between countries. In this class you learn about exchange rates and other fun things.
Corporate Governance
Who looks at how we control company managers to make sure they do not misuse company funds, while this is associated directly with managing companies and is also important to investors who might not want to invest in poorly run companies.
Quickly see how the market is doing Measure market or asset class returns risk Benchmark performance of professional investors Create funds to sell to investors
Why are the stock market indexes used?
Order Type Quiz: You want to buy shares of Apple 5% lower than the current Ask price. You want to buy shares of Apple, believe they are priced fairly and want them bought quickly
You want to buy shares of Apple 5% lower than the current Ask price. Limit buy order You want to buy shares of Apple, believe they are priced fairly and want them bought quickly Market buy order
Eurobond
a bond denominated in a currency other than that of the country in which it is issued. For example, a dollar-denominated bond sold in Britain would be called a Eurodollar bond.
What are the goals for market regulation?
to promote ethical behavior so investors trust and use the markets. Control Fraud. Fraud includes lying and cheating. Promote Fairness between investors: Agency problems relate to relationships between owners (principals) and management (agents). You can apply this to companies and shareholders to investors and investment advisors. Fairness relates to equal access to information related to securities. Set standards for professionals: Standards are designed to promote good ethics and knowledge to give good advice. Ensure liabilities (pensions) are funded
