Finance Final Exam: New material

Is the stock market rigged?

-due to micro-structure issues, some investors do have an advantage -the returns are small but volume is large

Is the stock market always right and can it be wrong?

-stock prices are the best unbiased expectation of future cash dividends -no concept or prediction is right or wrong

Characteristics of municipal bonds:

-typical denomination of $5,000, with varying maturity -Munis have favorable tax treatment- they are exempt from state and federal taxes

What are the three controversial topics?

1. Algorithmic trading, high frequency trading, flash trading 2. Dark pools 3. Penny stocks

T-bonds mature in more than ______ years.

10 Original maturity of 30 years

During the financial crisis, US employment rate was over ____________ in October 2009, the highest level since 1983.

10%

T-notes mature in ____ to _____ years.

1;10 Original maturity of 2, 3, 5, 7, and 10 years

______________________: two classes of common stock are outstanding, with differential voting rights assigned to each class.

Dual-class firms

The noble price committee in 2013 was split between:

Eugene Fama and Robert Shiller

Until 2004, the largest portion of bonds were in US dollars, followed by the Euro, Japanese Yen, and Pounds. In 2004, _____________ passed the US dollar as the largest portion of bonds outstanding.

Euro

____________________ holds the most treasuries.

Foreign investors

Primary markets is related to the _________ ___________ ____________.

Initial public offering

LIBOR

London Interbank Offer Rank; the rate paid on Eurodollars

In the event of liquidation, common stockholders have the _____________ priority in terms of any cash distribution. Common stockholders have the ____________ priority on the corporation's assets in the event of bankruptcy.

Lowest; Lowest

What is the relative ranking of liquidity for secondary market liquidity?

Most liquid: Treasury notes/bonds Corporate bonds Municipal bonds

Emerging markets and ___________ ___________ are increasing in importance.

Pacific Basin

________________ has the largest stock market in the world.

The United States

____________ form is when stock prices reflect all past trading information including history of past prices, trading volume, or short interest.

Weak implication: technical analysis, or trend analysis, has no value as a trading strategy (example- Eugene Fama discovered that stock prices appear to be random)

Repurchase agreements

an agreement involving the sale of securities by one party to another with a promise to repurchase the securities at a specified price and on a specified date -denominations range from 100k to 10M, with 1M being the most common -maturities range from 2 weeks to 1 year, with most having a maturity of 1 to 4 months -in primary market, banks post rates for CDs daily and sell them until they meet their funding needs; there is a secondary market but it is not very active

Discount and bond equivalent yields are ____________ but underestimate the true yield that could be earned due to compounding interest.

annualized

Treasury notes and bonds are ___________ risk-free due to backing from the US government.

default

Raw returns do/do not incorporate broader market movements.

do not

Eurodollar deposits

dollar denominated deposits held offshore ex- account in South Africa that holds dollars, not rand

The secondary market _______ for municipal bonds, but there is relatively infrequent trading and a thin secondary market due to lack of information about the bond's details and issuers.

exists

Treasury bills and commercial paper are bought and sold on discount basis, meaning that the purchase price is less than the ________ __________ of the security when it matures.

face value

_________________ hold the most corporate bonds.

financial institutions

With fast thinking you:

make quick decisions, exert low effort and are prone to errors (example- texting)

Revenue bonds finance a specific _______________________ project and are backed by cash flows from that project.

revenue generating -also, collateral can be offered, but general tax revenues cannot be used to make payments

Overall, T-bills are considered to be the _________________ asset in the US

risk-free

The three forms of market efficient hypothesis:

weak-form (holds), semi-strong form (debatable), strong-form (does not hold)

Examples of organized exchanges are:

NYSE (largest dollar amount of stock traded), NASDAQ (has most firms listed), smaller regional stock exchanges in Chicago, Philadelphia, Boston and Cincinnati

Dividends are paid out of _________ __________.

Net Income

Is investing in stocks simply gambling?

No. The differences include: -unexpected return (positive for stock investing, negative for gambling -economic intuition: bearing risk for stock market investing

Who are the major issuers in the bond market?

federal, state and local governments, plus corporations

____________________ hold the most munis and corporate bonds.

financial institutions

Who are the major purchasers in the bond market?

financial institutions, households, businesses, government unit and foreign investors -households own 45% of municipals, 10% of treasuries and 19% of corporate bonds -financial institutions hold 22% of treasuries, 53% of munis and 60% of corporate bonds

General obligation bonds are backed by the _______________________ and ______________ of the issuer.

full faith; credit

Revenue bonds represent a ________________ portion of the muni market than GO bonds.

greater

The main idea behind money market securities is that they giver __________ returns than holding cash and are very ____________.

higher; liquid

You cannot lose more than the __________ _________ paid for stock.

initial price

Treasury notes and bonds are not ___________ _______ risk free because of longer maturities, they are exposed to this risk.

interest rate

Municipal bonds face _______________________ risk and substantial ______________ risk. They also have limited _____________ market trading.

interest rate; liquidity; secondary

___________________ bonds are those rated above Baa (Moody's) or BBB (S&P/Fitch).

investment grade bonds

Why are dark pool controversial?

less regulation than other exchanges, potential for operators of pools to favor some traders over others

Treasury notes and bonds are no ____________ risk free because some older notes/bonds are not as heavily traded as newer notes/bonds.

liquidity

Corporate bonds are _______ term bonds issued by corporations.

long

Unexpected connections in the economy:

-Lehman brothers (a large investment bank) went bankrupt and General electric (a non-financial firm) could not operate

The pros of investing globally are:

-ability to diversify risk -exposure to growth in wealth of emerging countries

What changes stock prices?

-announcement of merger -new information (since new information is unpredictable, then stock price changes are random

Characteristics of treasury bills:

-denominations are multiples of $100 -original maturities are typically 13 weeks or 26 weeks but can be from a few days to 52 weeks -typical purchase is a round lot of $5 million, but secondary market sales can allow for other increments

Who has exposure to stock markets?

-includes: stocks, mutual funds, self-directed investment (401k) plans -stock market participation peeked at 65% in 2007, down to 52% in 2013 (post-crisis) and does not include those with pension funds (about 20% of workers) -median family income is 57k- half of stock holders earn less than this amount

Why do we need bond ratings?

-it is difficult for small investors to estimate default risk (it is difficult to understand all the covenants and provisions of bonds) -financial institutions are required to hold only bonds with high ratings -secondary market trading can be thin if information on the risk of bonds is not available

The cons of investing globally are:

-lack of information can make it difficult to evaluate firms in other countries -exchange rate risk -political/sovereign risk -different regulation standards in the US than other countries

Trade offs of AAA rating:

-only two AAA companies as of April 2016 (Microsoft and Johnson & Johnson -with ultra low rates, companies would prefer flexibility rather than maintain rating -benefits: lowers cost of debt -costs: less financial flexibility

Is the stock market too volatile?

-stocks are more volatile than bonds, by design -risk should be proportional to return -Shiller shoes evidence that the market it too volatile, possibly do to irrational investors

Why are stock market indices important?

-used to predict understand economic changes -used in passive investing -used in event studies

During the financial crisis, Home foreclosures reached record highs, including _________ households in default on their mortgage in 2009.

1 in 45

Discount yields take into account the fact that maturities are less than _________ and there is no __________ ___________.

1 year; interest payment

Michael Milken (investment banker- controversial) discovered two things:

1. "fallen angels" had yields that were abnormally high, thus lower prices because institutions were reluctant to hold fallen angels 2. Convinced small and medium sized firms to issue junk bonds (high yield) because it opened the market for small/medium firms to use bond financing and is therefore known as the "Junk bond king"

What are two examples of stock market efficiency? And what form of market efficiency do they support?

1. CNBC moving markets (good news reflected in stock price within 3 minutes and bad news reflected in stock price within 12 minutes due to difficulty of selling short) 2. Recent evidence (with increases in computing power, trades can happen more quickly and arbitrage time drops to 7 milliseconds) Support semi-strong form

Moderate political risk countries:

1. India 2. UK 3. Spain 4. Russia

Lehman Brothers to General Electric:

1. Lehman bankrupt, CP worthless 2. Reserve primary fund "broke the buck" with NAV at 0.97 3. Run on MMMF 4. Shortage of buyers of CP 5. Credit crunch in CP market 6. GE unable to operate lesson learned: failure of Lehman Brothers had unexpected effects, almost impossible to predict, and spill-over to non-financial firms

Low political risk countries:

1. Norway 2. Canada 3. US 4. China

The three basic characteristics of money markets:

1. Original maturity of one year or less (little interest rate risk) 2. Low default risk (short maturity of high quality leaves little risk of late or non-payment) 3. large denominations (generally sold in units of $1-$10 million, keeps transaction costs low relative to the interest paid, prohibits most individual investors from investing directly in money market securities)

Deals of treasury bills in secondary markets:

1. Primary government securities dealers (roughly 20 financial institutions; designated by Federal Reserve Bank of New York; purchase the majority of T-bills sold competitively at auction; create an active secondary market) 2. small dealers (roughly 500 small dealers who trade directly in the secondary market; trades routed through primary government securities dealers)

The major characteristics of common stock are:

1. Residual claim status 2. Voting Rights 3. Discretionary dividend payments 4. Limited liability

High political risk countries:

1. South Africa 2. Mexico 3. Haiti 4. Somalia

What 4 pieces of evidence are against the efficient market hypothesis?

1. excessive volatility (stock prices are much more volatile than the underlying dividend stream)- Robert Shiller 2. anomalies (predictable returns for small vs. large, value vs. growth, momentum, January effect) 3. sentiment (sunshine, sports) 4. economic linkages (customers and suppliers)

The 4 implications of efficient market hypothesis are:

1. fair returns (earn return based on the risk they bear; differentiates stock market investing form gambling) 2. rewards exist (hard work, time, effort and creativity can be rewarded) 3. market prices are not right or wrong (they are simply the best unbiased expectation of future cash flows) 4. passive index funds are the best investment (active management is largely wasted effort)

The 5 potential causes of the financial crisis:

1. The housing market (the trigger): graduate rises in housing prices, buying houses then selling for profit, standard practice that requires down payment of 20% and documentation on income, as house prices rose leaders loosened lending standards, this increased demand for houses which caused prices to rise even higher -"Wall street and the housing bubble": mid level managers in scrutinized finance did not time the housing market 2. The financial sector (existing vulnerabilities): mortgage lenders had incentive to make loans and then sell them, institutions sold securities to some clients and advised others against buying, inability to understand complexity of new innovations and industry interconnect, new innovations thought to spread risk and actually concentrated risk, banks had survived the dot-com crash and possibly overestimated their ability to survive another crash 3. Debt: excessive leverage of both individuals and financial institutions, over-reliance on short term funding and non financial institutions 4. political factors: bi-partisan support for increased homeowner insurance (unintended consequences), deregulation 5. fragmented regulation: AIG did not have comprehensive regulation, investment banks lacked oversight, and lack of attention to system as a whole

4 points about LIBOR vs. Federal Funds rate:

1. There is a strong correlation between LIBOR and Fed Funds rate. 2. Fed Funds rate tends to be slightly lower due to 1. bank deposit insurance and 2. implicit guarantee that the US government will bail out banks if necessary 3. During the financial crisis, the Fed kept the fed funds rate extremely low however LIBOR spiked significantly 4. LIBOR is based on a survey of bankers while fed funds rate is based on transaction data

Major issues since the financial crisis:

1. legislation -TARP: immediate help for firms -Dodd-Frank Act: comprehensive legislation designed to reform the financial industry -highlights: more capital, systematically important financial institutions, living walls, limits on ability of Fed to rescue individual institutions 2. More oversight of whole system -Financial stability oversight council, systematically important institutions, Federal Reserve has increased authority 3. CEOs (almost every CEO of the major financial firms lost their job, most were granted generous severance packages, called "golden parachutes") 4. criminal prosecution (essentially no criminal prosecution of top executives of financial firms, strategy is to make firms pay large fines rather than try to send executives to prison, very difficult to prove that illegal activities occurred, having bad incentives and taking large risks is not illegal) 5. rating agencies (fines related to issues after the crisis, no change to underlying business model) 6. Changes to commercial banking (more capital and liquidity, increased accounting transparency, reduce exposure to financial markets (OTC), limits on size, living walls, change in compensation strategies (more long-term compesation)

What are the two approaches when estimating abnormal stock returns around events?

1. market adjusted returns 2. market model adjustment returns

Example of irrationality:

1. overconfidence (90% of drivers in Sweden ranked themselves as an "above average" driver) 2. framing bias (decisions are affected by how choices are posted- example: Linda)

The 2 ways to create an index:

1. price-weighted average: add the price of the stocks and divide by a divisor -equivalent to buying one share of stock in the portfolio, corresponds to buy and hold strategy of buying one share (divisor starts at one and is then adjusted for dividends and stock splits) -issue: high price stock can dominate a price-weighted average 2, value-weighted average: calculate total market value of all firms then divide by divisor -equivalent to investing in a portfolio with weights equal to market caps of firms divided by total market cap of all firms -corresponds to buy and hold strategy of weighting by market cap -Example- S&P 500 (market leaders in industry sectors)

The 2 step trading process for municipal bonds in the primary market:

1. public offering (municipality solicits several investment banks and has them compete to offer the highest price on the bonds, the winning investment banker buys the bonds from the municipality and the re-sells the bonds, the investment banker distributes the bonds to other investors through mutual funds and pension funds, or the most common way- through municipal bonds. 2. private placement (municipality seeks to find large institutional buyer to purchase the entire issue of bonds, less well known issuers tend to choose private placements, less liquid secondary market due to regulations on trading privately placed, interest rates tend to be higher for private placements than public offerings)

What are the 5 potential flaws with the behavioral critique?

1. relies on irrationality 2. relies on lab experiments (may not carry over to real life) 3. lack of unified framework (inconsistent in terms of support for which irrationality?) 4. lack of impact on stock prices 5. limits to arbitrage (trading costs, limited attention, restrictions on trading can help explain some findings)

How do you calculate market model adjustment returns?

1. run regression to estimate alpha and beta 2. predict the expected return 3. calculate market model adjusted return (abnormal return) alpha + beta * return from S&P 500 = expected return raw return - expected return

The 2 criticisms of rating agencies:

1. slow to react (Enron bonds were not downgraded until less than 1 month prior to its bankruptcy, despite the company posting losses of $1 billion and announcing restatements; they also failed to downgrade mortgage backed securities before the financial crisis arose) 2. Incentives are not aligned with investors (rating agencies are for-profit companies and their income comes from bond issuers, internal surveillance teams are more accurate than external facing rating teams, larger issuers get better ratings even after controlling for risk)

Corporate bonds represent ______ percent of all outstanding long term bonds.

43

During the financial crisis, Dow Jones Industrial average fell ______ in value from late 2007 to early 2009 while the S&P 500 Index erased it gains from the previous ____ years.

53.8%; 10

During the financial crisis, the Federal government bailed out ___________ (one of the largest insurance companies) and ______________ (on of the largest commercial banks)

AIG; Citigroup

Common stockholders elect a __________________________ that hires and oversees senior managers. Senior managers perform _______________________ tasks of the firm.

Board of Directors; day-to-day

________ on corporate balance sheets is not piled in a vault, it is mostly invested in money market securities.

Cash

During the financial crisis, the federal government bailed out, following by bankruptcy, of automotive firms ____________ and ____________ in 2009.

Chrysler; General Motors

____________ ______________ appear as an issuer and investor for almost every instrument.

Commercial paper

Which is the riskiest: common stock, treasury bonds, or T-bills?

Common stock, then treasury bonds, then T-Bills

An arbitrage opportunity exists if the convertible bond value falls below the ______________ value.

Conversion

At high values of the firm, the convertible bond's value rises and is close to the _____________ value of the stock.

Conversion

Money markets are markets that trade _______ _______________ or instruments with maturities of less than one year.

Debt securities

____________ ________________ is a key participant because of influence on T-bills, use of repos, targeting federal funds rate, etc.

Federal Reserve

During the financial crisis, _______________________________ either failed, were acquired, or converted to bank holding companies.

Major investment banking firms

_____________ ______________ is traditionally conducted through the buying/selling of T-bills.

Monetary policy

________ ____________ _________ _____________ are important because they allow small investors to participate in this market.

Money market mutual funds

_____________ __________ outside ownership of the firm is not affected by bankruptcy of the company.

Personal wealth

The 5 money market securities by denomination most common (largest to smallest):

Repurcahse agreements, T-bills, CDs, commercial paper N/A to federal funds

Bond rating companies:

S&P 500: 50% Moody's: 34% Fitch: 13% Other: 3%

_________________________________: Spiegel/Murphy jointly own 18.7% of the firm's stock but control 88.5% of the voting rights of the firm.

SNAP voting rights: Class A- no voting rights Class B- 1 vote per share Class C- 10 votes per share

Treasury bill auction:

Step 1: bids given -competitive bidders give 1. amount desired 2. price/yield willing to accept -non-competitive bidders give 1. amount desired, no price/yield given, as they accept the outcome of the auction, limits on amount than can be bid non-competitively, this is only 2% of the process Step 2: auction clears (stop out price: the price that all bidders pay for securities) Step 3: investors allocated t-bills (if the amount bid at the stop-out price exceeds the total amount available, then bids are allocated on a pro-rata basis)

Rank the 5 money market securities by secondary market liquidity (most liquid to least liquid)

T-bill, CDs N/A to CP, repos, Red

Rank the 5 money market securities by maturity (longest to shortest)

T-bills, CDs, CP, Repurchase agreements, Federal Funds

Dividends are determined by ___________________________.

The Board of Directors

Treasury Inflation Protection Securities (TIPS)

The structure: -coupon rate: set, does not change -principle: increases/decreases based on inflation every 6 months Inflation is calculated by changes to the Consumer Price Index (CPI)

Corporate bonds are ______________ from state/local taxes and ____________ from federal taxes.

not exempt; not exempt

The LIBOR scandal is when __________ manipulated LIBOR in order to appear stronger than they were, and to profit from trading activities (LIBOR likely to be phased out by _____)

banks; 2021

Efficient market hypothesis: the hypothesis that prices of securities fully reflect ____________________________ about securities.

all available information

Capital gains are/are not tax exempt.

are not

Municipal bonds are/are not default risk-free.

are not -source of repayment is tax receipts or revenues from a project, and this is limited -many cities defaulted on their bonds during/after the financial crisis

Primary markets are like an ____________ and secondary markets are _______________ and very active (both similar to T-bills).

auction; decentralized

The solution to discount yield:

bond equivalent yield

What is algorithmic trading, high frequency trading and flash trading?

buying and selling, often very quickly, using computer programs. This type of trading can involve holding a position for only a few milliseconds. For a fee, traders are allowed to see incoming orders milliseconds before general market participants.

Why is algorithmic trading controversial?

can be used to skim profits from other traders by trading quickly in front of an incoming order. Can be considered "rigging the market", only provides liquidity in good markets but not bad/volatile/declining markets

With slow thinking you:

carefully think through a provision, exert high effort, and it almost always results in a good decision. (example- exam)

Issuers need ______ for a short amount of time.

cash

General obligation bonds have no ________________ or specific _____________________ promising repayment.

collateral; revenue stream

Eugene Fama's conclusion: random stock prices changes mean that the stock market is ___________.

efficient

Why is algorithmic trading beneficial?

computer programs are not susceptible to emotions and potential trading errors; provide liquidity in market

Bonds that can be converted into equity (stock) at a pre-determined rate.

convertible bonds

How public firms are financed: What is the percentage of dept, equity and internal?

debt- 23% equity- 7% internal- 68%

T-bills are virtually ____________ risk free and have little _______________ and ____________ risk.

default (due to being backed by the US government); interest rate (due to short-term nature); liquidity (due to active secondary market)

How are treasury notes and bonds similar to treasury bills?

default risk-free, primary and secondary market trading

With corporate bonds, investors face ___________ risk and _________ risk. _________________ risk exists in secondary markets, unlike most of the trading of treasury securities.

default; interest; liquidity

The goal of rating agencies is to:

estimate the default rate (by considering company information as well as bond specific issues) -assign letter grades to bonds based on perceived probability of default

Treasuries are ___________ from state/local taxes and _____________ from federal taxes.

exempt; not exempt

__________________ are bonds that have been downgraded from investment grade to junk bond status.

fallen angels

____________ bonds are those rated below Baa (Moody's) or BBB (S&P/Fitch).

junk

The treasury bill secondary market is the ____________ secondary market of any US money market security.

largest

Short ____________ of securities drives main characteristics.

maturity

The only different between T-notes and T-bonds is their ____________.

maturity

Common stockholders also vote on major firm issues such as _______________________, ______________________, and __________________.

mergers/acquisitions, choosing auditor, compensation plans

Purchasers prefer to invest in __________________ rather than hold cash.

money markets

Why are penny stocks controversial?

often harms small, unsophisticated investors

What is cash?

on corporate balance sheets, it is mostly invested in money market securities; these funds are being used by other firms in the economy

Secondary markets are either ____________ _____________ or ____________ _____________.

organized exchanges; decentralized markets

Decentralized markets consist of stock that trade _____ ______ _________.

over-the-counter (OTC) Very small firms, but larger number than in organized exchanges (possible 30,000 stocks) and tend to be illiquid stocks, infrequent trading and subject to price manipulation

The key to evidence against the efficient market hypothesis is that you need to know that stock price changes are _____________ in order to provide evidence against EMH.

predictable

Corporate bonds can be traded in ____________ markets (public sale or private placement) or ________________ markets (1. over-the-counter trading- most of bond trading or 2. NYSE bonds trading platforms-small amount of bond trading)

primary; secondary

T-bills are traded in ___________ and ___________ markets.

primary; secondary (over $1.5 trillion dollars outstanding in 2013- rate of return 0.24%)

There is no ____________ dividends and no ___________ ___________ if dividends are not paid but there is potential for very large dividend payments if the firm is highly _________________.

promised; legal recourse; profitable

Psychological research (mostly experiments) show that people are not always ________________, are not _______________, and their tastes do change.

rational; selfish

The prices of stock are ________ ___________ but the change in prices (returns) was _____________.

rationally determined; unexpected (random)

A potential flaw of the efficient markets hypothesis is that it relies on investors behaving ___________________ and in _______________________.

rationally; their own interest

How do you calculate market adjusted returns?

raw return- overall stock market return

Common stock is __________ than bonds of the same firm.

riskier

Revenue bonds are ___________________ than GO bonds, thus interest rates are higher.

riskier

How are Treasury notes and bonds different from Treasury bills?

semi-annual coupon payments, maturity, interest rate risk, liquidity risk

Corporate bonds typically have $1,000 face value and pay interest ________________.

semi-annually

T-notes and bonds pay interest ____________________, denominations of multiples of $______.

semi-annually; 100

________________ form is when stock prices reflect all publicly available information regarding the firm which includes past trading information, fundamental data on the firm's product line, quality of management, accounting statements, patents held, earnings forecasts, and accounting practices.

semi-strong implication: passive strategies are best (example- Airtran stock price reaction to merger announcement) downside: small vs. large anomaly

There is strong evidence against the ________________ form of EMH.

semi-strong -the behavioral critique of the efficient market hypothesis is important to our understanding of how markets work but we need more research to validate this critique -our understanding of behavioral finance is at the early stages

Federal funds

short term funds transferred between financial institutions, usually for a period of one day -maturity is typically 1 day -sold in the primary market- highly liquid

On the issuer's side: the need for ________________funds arises because immediate cash needs do not coincide with receipts of cash

short-term -federal government collects taxes quarterly, has daily operating expenses (ex- retailers stock shelves before black friday shoppers arrive)

Why are penny stock beneficial?

small firms can access equity markets, usually to allow early investors to diversify easily

Examples of lack of selfishness:

split the $100 50/50 ("split the pie"), rational: 1/00 split and acceptance

At low values of the firm, the convertible bond is valued similar to a _________________ bond, because the conversion value is not very large.

standard

Municipal bonds are securities issued by _________ and _________ _____________which are used to fund temporary imbalances between operating expenditures and receipts or to finance long-term capital outlays.

state; local governments examples- Greenville country Schools, Clemson Littlejohn Coliseum, new business college

What are penny stocks?

stocks that trade for less than $5 per share; frequently subject to "pump-and-dump schemes"; manipulating the price of stock with false stories, then profiting from either the rise or fall of the price

___________________ form is when stock prices reflect all relevant information, including private information held by insiders of the firm.

strong implication: insider trading should be unprofitable Insider trading is profitable, but illegal (Martha Stewart and Imclone)

With general obligation bonds , the issuer uses _______________ authority to repay, which may require taxpayer approval.

taxing

Why are money markets important?

they serve to reallocate the fixed amounts of liquid funds available in the market at any particular time

Why are dark pools beneficial?

traders that want to move large positions do not have to worry about their price impact or front-running by high frequency traders

What are dark pools?

trading networks that provide liquidity but do not display trades on order books- comprises over 40% of all trading

We need lots of ____________ and few _____________ for the efficient market hypothesis to hold.

trading; friction (frictions can be lack of legal protection, corruption, lack of information, or market micro-structure issues)

The purpose of money markets is to _____________ _____________ from hose with short-term excess funds to those with short-term needs for funds.

transfer funds

Short term obligations of the US government issued to cover government budget deficits and to refinance maturing government debt

treasury bills

________________ _______________ and ____________________: long-term securities issued by the US treasury to finance the national debt and other federal government expenditures.

treasury notes and bonds

At medium values of the firm, the convertible bond's value consists of the ____________ bond value plus the __________ to convert if the stock price is high enough.

underlying; option

Commercial paper

unsecured, short-term promissory note (debt) -generally sold in denominations of $100k -maturities range from 1 to 270 days (most common is 20-45 days) -sold on primary market directly through a dealer but there is not secondary market

The effects of the crisis were felt ______________ with economic stimulus plans and bank bailout enacted in the UK, Belgium, Canada, Italy, and Ireland, among other countries.

worldwide

The problem with discount yield:

you cannot compare to yields on other bonds and stocks

On purchaser's side: holding excess cash is expensive because it earns ________ interest.

zero -banks hold investment securities (ex- Apple)