Money & Capital Markets
issuers
-_______________of mortgage loans are typically small, relatively unknown financial entities, thus only the mortgage lender benefits from investigating the borrower's financial condition fully
underwriting new securities sold in primary markets, dealers and brokers in the secondary markets, merger and acquisition advising, private placement financing, asset mgmt, prime brokerage
investment bank's primary activities
Europe
investment banks in the U.S. trace their origins to the prominent houses in __________________
add on instruments
like fed funds and repos, negotiable CD's are +______________ with interest paid over and above the principal balance using a 360 day year
payment caps
limit the max amount by which the monthly pmt can increase each year or over the life of the loan
nonfinancial corporations, A/R
liquidity management problems also plague ________________, as the inflow of cash comes from the collection of _____________ that have been generated from sales
discount rate
loans from the Fed are for short periods of time, and the rate charged is referred to as the ________--
term insurance
is pure life insurance protection for a specified period of time, less than all of life ..is the purest form of life insurance and provides death protection only and does not develop a savings reserve or cash value
insurance
is the transfer of a pure risk to an entity that pools the risk of loss and provides payment if a loss occurs
corporate bonds
long term IOUS that represent a claim against the firm´s assets, fixed returns
municipal bonds
long term debt obligations of state nad local governments used for things such as schools, highways and airports, coupon income exempt from federal income taxes , not considered liquid
higher
long term interest rates are usually ____________ than short term rates due to risk premium
mortgages
long term loans secured by real estate, largest segment in the capital markets in terms of the amount outstanding
volume
marketability is often gauged by the __________of a security's secondary market
money markets
markets for short term often unsecured debt: are where depository institutions and other businesses adjust their liquidity positions by borrowing or investing for short periods of times
proxy
mas de los inversores asistan fisicamente a la reunion, pero votan por __________________,un proceso a el que los inversores votan por absentee ballot
premature death
means loss of life while other are financially dependent on the person who died
risk transfer
means shifting the responsibility of bearing the risk from one party to another party
pooling
means that losses suffered by a small number of insureds are spread over the entire group of insureds so insurance purchasers substitute the average loss in place of the uncertainty that they might suffer a large loss
retention
means that the individual or business is responsible for this loss Ex: uninsured risk and the physical damage
rolling over paper
means that the issuer sells new commercial paper to get the funds to retire maturing paper
1. bidding a price too low to receive any bills 2. bidding a price substantially higher than the market equilibrium
noncompetitive bids were designed to allow small investors who are not familiar with money market interest rate movements to purchase Treasury securities to avoid the risks of :
equally sensitive
not all suppliers of loanable funds are __________ to changes in interest rates
rights offering
occasionally, a company places equity securities directly with its existing stockholders through a _______________, this is where a company's stockholders are given the right to purchase additional shares at a slightly below market price in proportion to their current ownership in the company
competitive offering
occurs in a public sale of bonds and is an auction: the issuer advertises publicly for bids from underwriters and the bond issue is sold to the investment banker submitting the bid resulting in lowest borrowing cost to the issuer
Federal Reserve Bank of NY
of the 12 FOMC members and of the 5 banks in this membership, the ___________ has a permanent representation while the other 4 rotate their position on the board
full service brokers
offer research staff, individual financial planning and a specific broker dedicated to handling your account
systematic risk
no matter how many securities we add, the total risk of the portfolio can only be reduced to the level of __________________, this is the risk that tends to affect the entire market in a similar way
auction markets
provide centralized procedures for the exposure of purchase and sale orders to all market participants simultaneously: they nearly eliminate the expense of locating compatible partners and bargaining for a favorable price
whole life insurance
provides coverage for all of life up to and beyond 100
increasing term
provides coverage that increases monthly or yearly, may maintain the purchasing power of the death benefit for the beneficiary
Treasury Dept
the _______has the responsability for paying the bills of the federal government and for advising the president's office on financial, trade, tax , and fiscal policy matters , they also print postage stamps, stamping coins, printing paper money , they also enforce fed finance and tax laws and investigates and prosecutes tax evaders, counterfeiters, forgers, smugglers and illicit spirits distillers
time value of money
the ___________ is based on the belief that people have a positive time preference for consumption...they prefer to consumer goods today rather than consumer similar goods in the future
business sector
the ____________ is almost always a net demander of funds
Fed
the ____________ plays a major role in check clearing, particularly in clearing checks drawn on depository instituions located in other market areas or different parts of the country
lower, lower
the ____________ taxes on the income from a security, the greater the demand for the security and the ___________ its before tax yield
market segmentation theory, narrow
the ____________ theory assumes that both issuers and investors have a preference for securities with a ___________- maturity range ....thus changes in interest rates in one segment of the yield curve have little effect on interest rates in other maturities
Banking Act of 1933
the ____________, often called the Glass steagall act, gave the Fed the power to regulate the maximum interest rate that banks could pay to depositors under Regulation Q...the Fed was give this power to prevent excessive and destructive competition among banks to attract funds from depositors ..though Q sometimes has negative effect ... so was phased out by the Depository Institutions act of 1982
federal governemnt
the ____________-'s borrowing is NOT influenced much by higher interest rates
target fed funds rate, tightens
the _____________ fed funds rate is set by the Fed as the monetary policy goal ....when the target is increased, it ________________ the money supply causing higher ST interest rates
the Fed
the _____________- conducts U.S. interventions in foreign currency markets and is the primary regulator of foreign banks operating the U.S. and U.S. banks operating overseas
term to maturity
the ______________ of a loan is the length of time until the principal amount is payable
steeper, greater
the ______________ the price-yield profile, the greater the bond's duration and thus the _______________exposure to interest rate risk
market equilibrium
the ______________- of interest occurs when the quantity of reserves demanded by depository institutions is euqal to the quantity supplied
discount rate
the _______________ is the rate of interest that financial institutions must pay to borrow reserve deposits from the Fed ``
higher
the ________________ the deflation rate, the lower the nominal rate of interest
subprime lending market
the _________________ was the epicenter of the 2008 finacnial crisis
FED, expand, sale
the __________________ is the only institution in the country that can expand or contract its liabilities at will , - to __________, it need only issue Fed reserve notes or write a check on itself -the _________ of securities by the FEd leads to a contraction of the money supply
secondary market, over the counter
the _________________for munis is thin and primarily an ________________market ....dealers find it hard to match buyers and sellers so the bid ask spreads are usually larger
greater, greater
the _______________a bond's duration, the __________________the % change in a bond's price for a given change in interest rates ---thus duration is a good measure of interest rate risk: it is positively related to maturity and inversely related to CR
Board of Governors, 4
the _______________is among the most powerful of all governmental bodies as its sets monetary policy and it is financially and administratively independent of both Congress and the president -the chairman is chosen from the existing peeps and serves a _________ year term
liquidity
the ability to convert an asset into cash quickly without loss of value, is different from marketability bc it implies that when a security is sold its value is PRESERVED
spot rate
the actual market rate of interest on a 1 year security today , time t: R @ t1
realized rate of return
the actual rate of return to the lender at the conclusion of the loan contract, may differ from the nominal rate that was agreed on at the time the loan was made
bid to cover ratio
the amount of tendered bids, competitive and noncompetitive, was x times the amount of acccepted bids
asked yield
the asked price converted into the bonds YTM
underpricing
the average IPO suffers from _______________, shares are usually sold to investors at an offering price on average about 15% below the closing price of the share after the 1st day of trading
smaller
the bid ask spread is _____________ for stocks that trade a lot
professional staff
the board's ___________ of econ experts and advisers is a significant source of informal power within the Fed
bondholder
the bond lender if referred to as the investor, or the __________
repo, reverse repo
the borrower in the repurchase agreement transaction is in a ___________ while the lender is in a ______________
bond issuer
the borrower is the bond _________
declining
the call option is more likely to be exercised when interest rates are ________________
1. helps firms identify M&A candidates that match firm's acquiring needs 2. bank does all analysis necessary to price the deal once an acquisition candidate firm is located 3. work with the acquiring firm mgmt , provides advice, helps them negotiate deal ....then assist acquiring firm in obtaining funds to finance purchase
the categories of M&A services that investment banks provide
credit aka default risk
the chance that the borrower fails to make coupon or principal pmts in the amount or at the time promised
reinvestment risk
the change in a bond's total return caused by changing coupon reinvestment rates ---if interest rates increase over the life of a bond, coupons will be reinvested @ higher yields, increasing reinvestment income -if interest rates decline ,reinvestment income decreases
1. low default risk 2. low price risk 3. high liquidity 4. large denominations
the characteristics of money market instruments
subprime lending market
the collapse of the mortgage market in 07 began in the _______ housing market and quickly led to the collapse of the speculative bubble in the housing market
U.S. treasury or agency securities
the collateral most used in repurchase agreements , but any type can be used
wholesale
the commercial paper market is almost entirely a _________________ money market
stable
the common element of economic models is that they produce interest rate forecasts assuming that the pattern of causality among economic variables is _________ into the future
rising, declining
the conversion option is most valuable during periods when stock market prices are ______________ and bond prices are ________________
interest rates
the cost of borrowing someone else's money to purchase goods and services, which must be paid back at a later date, usually expressed as an annual percentage of hte nominal amount of money borrowed ...the price of borrowing money for the use of its purchasingpower
bid ask spread
the dealer's profit for buying and selling t bills and represents the transaction costs incurred by invesetors for trading
senior debt
the debentures of corp bonds can be __________, giving the bondholders first priority to the firm's assets after secured claims are satisfied in the event of default
excess reserves
the decision to hold ___________- is a risk return tradeoff, that is , the bank gives up some potential earnings for additional liquidity and bank safety
M2
the definition of money tat emphasizes the role money plays as a store of value
M1
the definition of money that focuses on money as a medium of exchange, as it consists of financial assets that people hold to buy things with, transaction blaances
insurance companies, savings and loan assoc, pension funds , muutal funds
the demand for junk bonds came from: ___________________
high income peeps, property and casualty insurance companies
the demand for munis is usually from 2 groups: ________ and ______________
credit spreads
the difference between yields of debt instruments with different default risk, are called __________________...usually positive , but are nOT constant , changing with market conditions
put interest discount
the difference in yield between putable and similar nonputable bonds ....
understates
the discount yield _____________ the true rate of return on a treasruy bill as it assumes that the full face value was paid for the t bill instead of a discounted price and because it uses a 360 day year
private placements
the distribution of equity securities in which the investment banker acts only as the company´s agent and receives a commission for placing the securities with investors ...transactions in private mkts
marketability
the ease with which a security can be sold and converted into cash, depends in part on cost of trading and search for info
government security dealers
the econ function of __________________is to make a market for Treasury securities by maintaining an active position in most of the maturities issued ...this increases liquidity of Treasury securities
monetary policy
the economic goal of _____________ is to obtain the highest overall level of material wealth for society as a whole and for each of its members
defined benefit plan
the employer states the benefit thatt the employee receives at retirement
private insurance company
the entity that pools the risk and provides indemnification is usually a _____________
real rate of interest
the equilibrium rate of interest is called the ______________. This is the fundamental long run interest rate in the economy
loss reserves
the estimate of an insurance company on what it will owe in claims pmts in the future
beta
the extent to which a stock's returns are related to general market swings is measured with ________________
positive time preference
the fact that people prefer to consume goods today rather than tomorrow ...though future consumption may be less b/c they have foregone the opportunity to save and earn interest on their savings
real rate of interest
the factors that determine the _______________________ are the underlying determinants of all interest rates observed in the economy. It is determined in the ABSENCE of inflation , thus reflects the true cost of borrowing
federal agency debt
the fastest growing segment of the capital market is _______________ at 11.8% followed by corporate bonds and treasury notes and bonds
blue book
the final formal presentation at the FOMC meetings of info is contained in the ______________________, made by the board's director of monetary affairs ...suele contenga alternative scenarios for monetary policy
origination
the first step to bring new securities to markets, this is all the work necessary to prepare a security issue for sale
foreign exchange risk
the fluctuation in the earnings or value of a financial institution that arises from fluctuations in exchange rates
political risk
the fluctuation in value of a financial institution resulting from the actions of the U.S. or foreign governments
commercial banks
the focal point of corporate cash management strategy is the relationship with ________________
required reserve ratio
the fraction of req. reserves that the bank must hold as a specified percentage of the total deposits at the bank
liquidity
the function of secondary markets from an investor's perspective is to provide ________________at fair prices: this is acheived if investors can trade large amounts of securities without affecting the prices
carried interest
the general partners at most private equity funds are compensated into 2 ways, a management fee and _________________________
higher
the higher the expected rate of inflation, the ____________- the nominal rate of interest
shorter
the higher the market rate of interest, the ______________- the duration of the bond ....the higher the market rate of interest, the faster coupon reinvestment income accumulates
Federal Home loan bank ( FHLB)
the housing credit agency with the most debt outstanding
trading rooms
the hubs of money market transactions are the ___________ of dealers and brokers
fed funds purchased, fed funds sold
the institution that borrows the funds incurs a liability on its balance sheet is called -______ and the institution that lends the fed funds records an ASSET known as ______________
pure competition
the insurance industry approximates a model of __________________.hay un numero grande de compradoras y vendedores, un comprador o un vendedor no pueden cambiar , the commodity bought and sold is homogenous and the barriers to entry no son duros
fed funds rate
the interbank landing rate and represents the primary cost of short term loanable funds and is one of the most closely watched interest rates in the economy ....the rate on interbank loans is very volatile
fed funds rate
the interest rate that banks charge each other for overnight loans
nominal rate of interest
the interest rate that we observe in the marketplace at any given time is called the _______________. It's value reflects the factors that determine the real rate of interest plus the market's estimate of the degree of inflation in the economy
money market instruments
the interest rates on different ___________________- tend to fluctuate closely together over time
best efforts offering
the investment banker makes no effort to guarantee and instead promises only to make its best sales effort : the investment banker does not take on the risk assoc with underwriting and comensation is based on the number of securities sold
noncompetitive bid
the investor indicates the quantity of bills desired and agrees to accept the price based on the stop out discount rate of the auction....all of these bids are accepted before the award of any competitive bid
trading lot size
the large bank accumulates these balances from its various smaller respondent banks to reach_ ______________________...the small banks earns a fee for this
smaller
the larger the offering, the ________________ the underwriter's spread as a percentage of hte amount of funds being raised by the company
households
the largest net purchasers of capital market securities are _________________ with financial institutions a distant second
trading and principal investments
the largest portion of Goldman's sach's business , this is where investment banks act as brokers or dealers for existing securities in the aftermarket and GS's own proprietary trading and investing
Federal reserve notes
the largest single liability of the Fed consists of _______________ notes in circulation
indenture
the legal contract of a bond that states the rights, privileges and obligations of the bond issuer and the bondholder ...is overseen by a trustee, appted as the bondholders' rep: they initiate legal action on behalf of the bondholders if any provision of the indenture is violated
fixed rate mortgage, amoritized
the lender takes a lien on real property and the borrower agrees to make periodic repayments of the principal amount borrowed plus interst on te unpaid balance of the debt for a predetermined period of time. The mortgage is ________________ over time to the extent that hte period, usually monthly pmts exceed the interest due ...any pmts in excess of interest is credited towards repayment of debt....when the mortgage is fully amortized, the borrower obtains a clear title to the property
low demand
the low ___________ for funds relative to supply shoudl drive interest rates down in a sector `
coupon rate, coupon
the lower a bond's _______________ the greater the price volatility for a given change in yield ....thus lower ______________ bonds have a greater interest rate risk
more, higher
the lower the interest rates are expected to fall, the ____________ valuable the option, and the ______________the CIP
u.S. government
the main owner of Fannie mae and freddie mac after the 2007 crisis
open market ops
the main way that the Fed implements monetary policy
thrift institutions commercial banks life insruance companies pensionfunds government sponsored enterprises govt & private pools of mortgage backed securities
the major holders of mortgage instruments
federal govt and government agencies, state and local governments, and corporations
the major issuers of capital market securities are ____________
1. U.S. treasury bills 2. short term municipal securities 3. commercial paper 4. large negotiable CD's 5. federal funds and security repurchase agreements
the major money market instruments
wholesale market
the market for Treasury securities is mainly a _____________________ typical deals are $5 million individuals can buy directly from the Treasury or dealers
floor trading
the market will turn to __________________trading during periods of high volatility
financial markets
the markets for buying and selling financial claims , can be informal or highly organized
yield spread
the model used by practitioners to identify inverted yield curves computes the ________________ between the 10 year and 3 mos Treasury securities ...uses the fed funds rate as the short term interest rate
whole sale markets
the money markets are distinct from other financial markets because they are ____________________ markets and b/c of the large transactions involved
steeply, wider
the more _____________ the yield curve slopes upward, the ________ the spread between the borrowing and lending rates and the greater the profit for the financial intermediaries
larger
the more uncertain the investment bankers are concerning the market price of the equity securities being offered, the ___________the underwriter's spread
Veterans Admin mortgages
the mortgage and borrower must both meet requirements of the Vet. admins ...usually have very low or zero down pmt required
deductibles
the most common loss sharing provision , makes the insured responsible for the 1st portion of any loss that occurs: used in property insurance, health insurance and disability income insurance
firm commitment
the most common type of underwriting arrangement where the investment banker assumes the risk of buying a new issue of securities from the issuing corporation at a guaranteed price
underwritten offering, gross proceeds
the most common way to issue new equity securities: this is where the investment banker purchases the securities from the net proceeds and then resellls the securities to investors for a greater amount called the _______________
residual claim
the most distinguishing feature of common stock is its _____________-against the firm's cash flows or assets , if the firm goes bankrupt, C/S holders can't be paid until employees, govt, debtors are paid first ---C/S holders share directly in firm's profits
company's valuation
the most important aspect of the venture capital process is the _________________________-the 2 most common methods to do so are comparable companies and multiple scenarios
own money
the most important determinant of whether a borrower defaults on a mortgage loan is how much of his /her _________________ is put toward the purchase of the property
liquidity
the most important economic function of the money market is to provide an efficient means for economic units to adjust their _________________ positions
SEC
the most important regulator of the U.S. capital markets is the __________________________-. it requires that any security sold to the general public be registered with it, and that any potential buyer of the sec be provided with a prospecturs that fully describes the nature of the security and its issuer and all risks assoc with an investment in the security
CAPM
the most popular model of the relation between systematic risk and expected return
common stock
the most prevalent type of equity security, these shareholders ave no special dividen rights and the lowest priority claim if the company goes bankrupt
insurance
the most widely used form of contractual risk transfer is ____________
rise, decline
the nominal aka market rate of interest tends to _____________ during periods of economic expansion and ______________during economic contraction
deflation , real interest rate
the nominal interest rate can mathematically be negative when the ____________ rate is larger than the real interest rate
0
the nominal, or real rate of interest, can NOT decline below ____________, regardless of the rate at which the declines
federal land ank
the oldest government debt issuing agency in the system is the __________________...today there are 12 of them that make credit available to farmers
discount rate
the only interest rate the Fed can set is the __________ which is the interest rate that the Fed charges banks that want to borrow from the Fed
federal sponsored agencies
the only peeps who use fiscal agents to sell new issues now are usually _____________-- agencies that issue large amounts of securities such as the housing and farm credit agencies
return on investment
the output generated by a capital project is its ________________ -it needs to be greater than WACC for project to be approved
health insurance
the perils insured against in ____________are the medical costs associated with illness and injury and the loss of income ...can be purchased individually or made available through a group insurance plan
equilibrium rate of interest
the point where the desired level of borrowing by deficit spending units equals the desired level of lending by surplus spending units ...funds are allocated in the economy in a manner that fits people's preference between current and future consumption & all capital projects whose ROI > WACC are funded
asked
the price at the close of the day at which dealers sell securities to investors
bid
the price at the close of the day in % of face value at which dealers buy Treasury securities from investors
bid
the price dealers are willing to buy t bills, vs the spread which is the price at which dealers are willing to sell
long term bond, short term bond
the price volatility of a ________________ is greater than that of a _____________, holding the coupon rate constant
economic stabilization
the primary function of the Fed Reserve is ________________ through the management of the nation's money supply
corporate treasurers
the primary purchasers of CD's are ___________________--- interested in maximizing the return of their firm's excess funds while maintaining the liquidity and the safety of their principal : reason why secondary market is important
open market operations
the primary tool used by Fed because it can be done easily, without any announcement, almost instantamente
higher
the probability of loss under property /liab insurance is __________and property claims are often paid during policy period ...premium rev can only be invested for a shorter period of time
long term
the proceeds from the sale of capital market instruments are invested usually in _____________- assets such as industrial plants equipment, buildings and inventory
disintermediation
the process where firms raise capital in the direct financial markets rather than from financial intermediaries such as commercial banks
life insurance, health insurance and annuities
the products that account for a lot of insurer revenues
indirect financing (financial intermediation)
the purchase of direct claims, IOUs, with one set of characteristics from DSUs and the transformations of them into indirect claims, IOUs, with a different set of characteristics
guarantor
the quality of the financial guarantee depends on the reputation and financial strength of the _______________
360
the quoted yield on fed funds, assumes a __________ day year thus msut be converted into a bond equivalent yeild Ybe=Yff(365/360)
capital gains yield
the rate at which the value of the firm is expected to grow
real rate of interest
the rate of interest determined by the returns earned on vestments in productive assets, capital investment, in the economy and by individuals time preference for consumption
fed funds rate
the rate that banks charge to lend overnight funds to one another ..
2 to 2.5 %
the real GDP has slowed down and has grown at only _____________
3%
the real rate of interest has historically averaged about _______________%, rising during periods of business expansion and falling during periods of econ contraction
high
the reason for the existence of local markets i the ______________cost of gathering information about smaller issues and tax treatments of these bonds
1. difficult to make small adjustments to Reservie requirements structural problem
the reason why the Fed does not change RR to affect la politica monetaria ---sin embargo cuando the Fed cambie la reserva requerida, es hecho para resolver una __________________ en la sistema de bancaria
1. national market system 2. move towards 24 hr trading of equity securities 3. globalization of equity markets
the reason why with technology, competition has increased in the secondary equity security market
1. assure solvency of insurers 2. protect consumers who may have inadequate knowledge of insurance 3. hace seguro que las tasas son reasonable 4. hace seguro que sea habilidad insurance coverages
the reasons why insurance is regulated
term structure of interest rates
the relationship between a security's YTM and term to maturity is the ________________
velocity of money
the relationships between the money supply and economic activity M*V=Y where Y is the GDP
green book forecast
the report by the FOMC on the past and current econ conditions and then a 2 year national econ forecast
realized yield
the return earned on a bond given the reinvestment rate that the coupon pmts are reinvested at
total return
the return we receive on a bond that considers capital gains or losses and changes in the reinvestment rate
deflation
the reverse of inflation
underwriting syndicate
the risk (inventory risk) is that the securities may be sold for less than the ________________paid for them -in seasoned offerings, market conditions can change prices -in unseasoned offerings, there is no prior market price on which to base offering price
interest rate risk
the risk of fluctuations in a security´s price or reinvestment income caused by changes in market interest rates
interest rate risk
the risk related to changes in interest rates that cause a bond's total return to differ from the promised yield or yield to maturity
objective risk
the risk that an insurer faces once it has accepted the transfer of risk from insurance purchases, the deviation between actual losses and expected losses
institutional sales retail sales
the sales function is divided into 2 parts
thin
the secondary market for corp bonds is ____________, trading is relatively infrequent , corp bonds are less marketable with their special features and being long term
direct search
the secondary market furthest from the ideal of complete price information , where buyers and sellers must search each other out completely...securities that trade in these markest are usually bought and sold so infrequently that n third party, such as a broker or a dealer, has an incentive to provide any kind of service to facilitate trading ----the C/s of small companies, like small banks tradein this market
risk averse
the segmentation theory is extreme as it states that some investors are completely _______________ , which means that they do not shift the maturity of their holdings in exchange for higher yields
bank panic
the simultaneous failure of many banks during a financial crisis
disinflation
the slowing down in the rate of price increases, inflation
$1 million
the smallest denomination for a repo is _______________
1. seed financing 2. startup financing 3. expansion financing
the stages of venture capital investments
multiple price auction process
the switch to uniform price auctions eliminated the winner's curse, highest bidders paying the highest price, thus characterizes the ________________ process
1. firm's expected cash flow 2.amount of firm's fixed contractual cash pmts such as interest and principal/lease pmts 3. length of time the firm has been profitable 4. variability of the firm's earnings
the things that go into the bond rating of a compnay
productivity , thrift
the tradeoff between ______________ and ______________is the underlying force that determines interest rates ...this explains interest rates in the short run
1. OTC Bulletin Board 2. Pink OTC Markets Inc.
the two major electronic quotation systems
$1 million
the typical unit of trade in the brokered fed funds market is $1 million or more ...is possible to lend for longer than a day but is rare
risk
the uncertainty concerning the occurence of loss
commercial paper
the unsecured promissory note IOU of a large business
lowest
the upward sloping yield curve occurs when interest rates are _______________ on short term securities and it rises at a diminishing rate until the rates begin to level out on longer maturities....curve most commonly observed
fallen
the use of repos has __________relative to pre crisis levels
higher, greater
the value of the put option depends on interest rate expectations: the ___________ interest rates are expected to rise, the more valuable the option and the ___________-the interest discount
Nasdaq, nyse
there are more companies listed on the _______________. but the -includes more of the largest companies and captures more than 75% of the total U.S. equity cap
globalization
there is a continuin trend towards -_________________in insurance company operations
positive
there is a general _______________ relationship between term to maturity and duration...the longer the maturity of a bond, the HIGHER the bond's duration
structural unemployment
there is a mismatch between a person's skill levels and available jobs, or there are jobs in one region of the country but few in another region
inverse relationship
there is an ____________________ relationship between price levels and the purchasing power of money
dealers and brokers
there is no formal organization for money markets, thus central to the activity of the money markets are _________ and ________________ who specialize in one or more money market instruments
circuit breakers
these halt trading if the DJIA falls by a certain percentage within certain times
reciprocal/reciprocal exchange
these organizations operate like unincorporated mutuals and their objective is para minimizar la cuesta del seguro . cada miembro of a reciprocal insures the other members and in return, is insured by the other members
named perils coverage
these policies provide a listing of perils that are covered,if a loss is caused by a peril not listed, the loss is nOT covered
speculative risks
these risks have 3 possible outcomes: loss, no loss, gain
preferred stock
these shareholders receive preferential treatment over c/s with respect to dividend pmts and the claim against the firm's assets in the event of bankruptcy or liquidation ...do NOT vote for board of directors
hybrid market transactions
these transactions on the nYSe happen faster as traders no longer need to physically visit the post to submit an order to the specialist or traders can choose to skip the specialist and simply execute order electronically
policy loans
they're an asset for an insurance company
1. changes in money supply 2. government spending 3. econ activity 4. inflation
things contributing to interest rate
1. development stage of hte company 2 .valuation of industry comparables 3. financial history of hte company, its growth rate and its profitability 4. amount of influence that canbe exercise by te venture captialist 5. the amount of future dilution expected if additional venture capital financing is required
things that affect company valuation
Financial Regulatory Reform Act 2010
this act eliminated the Fed's role in supervising small banks , now the Fed only regulates large banks and bank holding companies with assets of more than $50 billion
the Glass Steagall Act , banking act 1933, public securities
this act separated the investment banking and commercial banking however did allow commerical banks some securities activities such as underwriting and trading in U.S. gov't securities and some state and local gov't bonds ...thus in the area of _____________, investment banks and commercial ones do compete
1985 Farm bill
this bill allowed Congress to provide direct federal aid to the FCS through a line of credit with the treasury as well as direct borrowing by the Farm credit bank ...strengthening the market's perception of an implicit federal guarantee of agency debt in the event of default
pension benefit guarantee corporation
this insures defined benefit plans up to a specified amount per month, if plan is overfunded when terminated, employer entitled to receive reversion of surplus assets
distribution
this involves the reselling of issues to investors ...the syndicates primary concern is to sell the securities as quickly as possible ata the offering price ...
private placements
this is where the investment banker acts as the company's agent and receives a commission for placing the securities with investors
TARP, Troubled Asset Relief Program
this program was seen as a bank bailout program and its reception was less than enthusiastic
primary market
the ______________for muni bonds has a large number of relatively small bond issues and these bonds tend to be underwritten by regional underwriters in the immediate area of the issuing municipality
greater
the ______________the excess of munis, the higher the tax-exempt yields must rise relative to taxable yields to induce individuals to purchase additional tax exempt securities
1980s
the _____________marked the beginning of the crumbling of Glass steagall's power to limit banks' securities activities
marketability
the _____________of agency securities varies with each type of security
federal government
the ___________historically has been a demander of loanable funds because it runs a deficit budget usually
Federal Reserve
the ___________is the most important participant b/c of its position as manager of the nation's money supply, it has no liquidity problems b/c of its ability to create money
Fed's
the ___________main goal to stimulate econ activity during the crisis was to keep short term and long term interest rates at low levels to encourage borrowing and capital investments
goal
the ___________of the insurer: developing an insurance rate that charges enough to cover claims and expenses and still make a proft
Treasury
the _________is NOT allowed to engage in monetary policy action , but can print money
McCarran Ferguson Act aka public law 15
this stated that the continued regulation of insurers at the state level was in the best interest of the public and that federal law apples only to the extent that state law does not apply
commercial banks
_________________ are the MOST important class of buyers and sellers of money market instruments and continuously adjust their liquidity b/c of the Short term nature of the liabilities
lower
shelf registrations have ______________spreads than ordinary offerings as larger well known companies do this
FINRA
stockbrokers must be licensed by the ___________________
aggressive stocks
stocks with betas greater than 1 are referred to as _____________-,carrying greater systematic risk than the market
defensive stocks
stocks with betas less than 1 and tend to subdue the effects of market movements on the returns of a portfolio
Fisher equation
suggests price level changes are acheived when the nominal rate of interest is divided into 2 parts: 1. the real rate of interest (in absence of price level changes) 2. anticipated % change over life of loan contract i=r+ (expected annualized price level change)
price weighted index
summing the prices of the individual index stocks, the sum of the prices is divided by a divisor to yield chosen base index value ...the divisor permanece constante menos que hay un "stock split, un dividendo, o cambie la composicion de la index
increase
surplus spending units are willing to supply more funds to borrowers as interest rates __________-- because lending is more profitable ...however as this occurs, deficit spending units pull back on spending because it becomes too expensive to borrow
highest, lowerst
surplus spending units wants to buy financial claims with the _________ yield, while deficit spending units want to sell financial claims at the __________ interest rates
cash outflow
taxation of STRIPs creates a cash _____________not necessarily offset by cash inflows from the same instrument in the same year
directly
terms on _____________ placed commercial paper are negotiated directly between the borrower and the supplier of funds
price stability
that for some large market basket of goods, the average price change of all the products is near zero , however within the market basket, the prices of individual products can rise or fall
forward rate
that interest rate that will occur 1 year in the future
natural rate or unemployment
the "full employment unemployment rate"
Russell 3000
the -________________encompasses the largest companies ranked by market cap
market maker , bid price
the -_______________is willing to buy the security at one price known as the ____________and sell it at a higher price, the ask price
1. weighting by the price of the company's stock 2. weighting by the market value of the company
the 2 approaches used to assign relative weights when calculating stock market indexes
housing and agriculture
the 2 areas that were principal beneficiaries of federal credit programs
vault cash reserves balance
the 2 components of the monetary base
full employment and sable prices
the 2 goals that have often been perceived as being in conflict are _________- & _____________ in the short run
government spending and taxation
the 2 main tools of fiscal policy are ___________- and ______________
federal repurchase agreemnts
the 2 money market instruments without secondary markets
1. all econ units do not have the ability to adjust equally to price level changes 2. high inflation rates are a disruptive force in the economy and increase uncertainty
the 2 problems with inflation
too big to fail
the 2010 act contained legislation designed to reduce the possibility that tax payers will be placed in the position to bail out financial firms whose failure threatens the overall economy, the so- called " " problem
underwriting
the 2nd step to bring new securities to markets, it is the process whereby an investment banker helps a firm sell its new security issue in the direct financial markets
legislation (laws,) court decision (create precedents)s, state insurance depts (insurance commisioner for each state who can issue, revoke, deny licenses, hold hearings, and place insurers in rehab or liquidation)
the 3 main sources of insurance regulation
1. brokers executing market orders 2. limit price orders left with the specialist for execution 3. specialist in the issue buying and selling for his own account
the 3 major sources of active bids and offering in an issue available at a post
distribution
the 3rd step to bring securities to markets, this occurs immediately after the securities are bought from the issuer and is the marketing and sales of securities to institutional and individual investors
1. direct search 2. brokered 3. dealer 4. auction
the 4 types of secondary markets
1. deterioration in financial institutions' balance sheets 2. busting housing bubble 3. abnormally low interest rates 4. an increasein uncertainty in the economy 5. banking crisis
the 5 factors that may have caused or contributed to the 2008 financial crisis
1. price stability 2. full employment 3. economic growth 4. interest rate stability 5. stability of the financial system 6. stability of the foreign exchange markets
the 6 goals for monetary policy las 6 metas para establecer la politica monetaria
reserve requirements, discount rate
the Board also sets ______________ and effectively sets the ______________, testifies on economic state before Congress and may represent u.S> govv in negotiations with foreign countries on econ matters
price weighted index
the DJIA is a _______________index of the 30 largest U>S> industrial, blue chip stocks , while the S&P is a ______________index consisting of 500 of the largest U.S> stocks from various industries
fiscal agent
the Fed Reserve acts as the ____________ for the U.S. treasury dept , it acts as a bank for the Treasury, which can pay its bills by writing checks from its account at the Fed
monetarist model
the Fed Reserve bank of St. Louis has a model of 8 basic equations and generates quarterly forecasts for a number of key economic variables , such as the change in nominal and real GDP, the change in the price level (inflation) the unemployment rate, and the market rate of interest
currency
the Fed Reserve system's ability to provide ________was established to eliminate the financial panics that had plagued the country when the public feared currency would not be available on demand
profits
the Fed as of now, continues to generate _______________ even with the losses to its mortgage backed security portfolio
expand
the Fed can ___________ the dollar amount of bank deposits by lowering reserve requirements on deposits thereby increasing hte money supply
open market operations
the Fed can buy and sell its largest asset category of government securities in the market at will through its -
monetary policy
the Fed can influence the fed funds rate only in the very short run by using its ______- to expand or contract the monetary base
influences
the Fed does NOT control the Fed funds rate, the fed ________________ the fed funds rate by affecting the supply and demand for reserves i nthe open market
1. open market ops 2. changing the discount rate 3. changing the RR ratio
the Fed has 3 tools to either increase or decrease the money supply
government securities
the Fed makes most of its earnings, 85% of it, from a large portfolio of -
float
the Fed must engage ni open market ops to offset the effect of _____________-, aka the difference between deferred availability cash items and cash items in process of collections
Financial Stability Oversight Council
the Fed share power with the _________________ to identify and monitor systemic risk posed by large firms
Congress
the Fed si the 3rd central bank of the country, the 1st two lost their charters, _____________- created the Federal Reserve System and thus can change or terminate its charter
margin requirements, 50
the Fed under the Banking act of 1933 could regulate stock market ++++++++++++++++++++which determine the proportion of the stock's value that can be used as loan collateral ....ahora, stock requirements are __________ percent
systemic risk
the Fed's most important gain from the Regulatory Reform Act was to expand its ability to manage _____________ in the economy, or the risk of the failure of the entire financial system resulting from the interdependencies among financial institutions
12
the Federal Reserve Act provided for 12 largely autonomous regional Fed Reserve banks coordinated by the Board of Governors in D.C>
open market operations
the Feds control the monetary base through the purchase or sale of government securities through ______________ operations
foreign exchange desk
the NY fed also houses the ______________________ which conducts foreign exchange interventions on behalf of hte Fed and Treasury dept
hybrid market
the NYSE has transitioned into a _____________-market that allows traders to choose to execute an order through a specialist or electronically
auction market, specialist
the NYSE is an example of an ____________________market, it has a ______________________who acts as both a broker and a dealer , each stock is traded at a post manned by a one of these people. Orders from public are sent from the brokerage house to brokers located on the floor of the NYSE who bring the orders to the appropriate posts for execution
market cap weighted
the Nasdaq composite is also ____________________and includes all domestic and international common stocks listed on the nasdaq , seen as a tech and or growth company index
pyramiding of rserves
the National Banking acts in the mid 1860s, allowed some banks to count deposits held at other banks as part of their reserves ...many banks could run short of reserves simultaneously
price of a bond
the PV of the future cash flows (coupon payments and principal amounts) discounted by the interest rate, representing the time value of money
Rule 144A
the SEC adopted this to liberalize the regulation of the private placement market, allowin secondary trading of private securities by large institutional investors , increasing liquidity and decreasing regulatory insight
expected rate of inflation
the TIPS coupon rate gives investors and govt policymakers with a simple way to calculate the ______________________ in the economy, as the principal and interest pmts on tTIPS are adjusted for changes in price levels, the hence the interest rate on these bonds provides a direct measure of the real rate of interest
NOT
the Treasury does ____________ issue STRIPS directly to investors, sold in multiples of $1,000, financial institutions or registered dealers and brokers buy Treasury securities and then create these components
Treasury INflation Protected Tips
the Treasury issues notes and bonds that adjust for inflation, the coupon rate on one of these is determined via the auction process , at maturity, the investor receives the greater of either the final principal amt or the initial par amt
discount window
the _____ which is where banks borrow from the Fed, was first designed to provide loans as a lender of last resort ...thus when the bank was unable to attract funds it needd in market, it could borrow from the Fed
the Board
the _________ can review and disapprove the regional district banks' discount rates and appoints the top officers in each district bank and determines their salaries
RR
the __________ determine the amount of funds financial institutions must hold a the Fed in order to back their deposits ----all have the SAME reserve requirements
value
the __________ of money is determined by the prices of a broad range of goods and services money buys in the economy ..aka the - of money is what you can buy with it
yield to maturity
the __________ tells us waht return we will earn on a bond if the borrower makes all cash payments as promised, if interest rates do not change over the bond's maturity, ad if the investor holds the bond to maturity
real rate of interest
the __________- rate of interest is always positive so negative interest rates occur mainly by imperfections in the market place
hybrid arms
ARMS with an intitial fixed rate that lasts 3 years or longer , mix of a fixed rate mortgage and an adjustable rate mortgage
property insurance
indemnifies policyowners for the financial loss assoc with the destruction and loss of use of their proeprty
proprietary trading
"prop trading" "prop desk"...where the investment bank uses its own capital to make bets...an internal hedge fund
decline, increase
an open market purchase cuases the fed funds rate to decline, and una venta para el mercado abierto causa el Fed funds rate to __________
1. NCD and financial commercial paper yields increase above target fed funds rate 2. T-bill yields fall very fast
---the first signs of flight to safety by money market investors
U.S. Treasury securities
_________________-are the best estimates for the default free rate ...the larger the dRP, the higher probability of default and the higher the security's market yield
demanders for loanable funds
-consumer credit purchases -business investment -federal government budget deficits -state and local government budget deficit
Suppliers of Loanable funds
-consumer savings -business savings (deprec. and RE) =state and local government budget surpluses -federal government surplus -federal reserve increases in the money supply
supply factors that decrease interest rate (shifting to the right)
-decrease in tax rate for individuals -increase in the money supply which increases funds for lending -shift in consumer attitude about saving
Demand factors increasing real rate of interest
-major breakthrough in technology: shift desired borrowing to the right, increasing real rate of interest -reduction in corporate tax rate, increases real rate of interest -increase in productivity of existing capital -increase in expected business product demand -demographic change
federal reserve district banks
-the 12 _________________ in each region assist in clearing and processing checks and certain electronic funds payments in their respective areas o the country -they also issue Fed rserve notes -act as a depository for banks in their respective districts -monitor local econ conditions -provide advice to the Fed Reserve Board -participate in the making of monetary policy
immediately available funds
1. deposit liabilities of Fed Reserve banks 2. liabilities of commercial banks that may be transferred or withdrawn during a business day
1. new electronic info processing technology reducing cost of gathering data, manufacturing and transmitting financial products to the ultimate user ...made creation of new financial products possible 2. regulatory taxes that commercial banks must pay relative to other financial firms
2 primary factors changing relationship between commercial and investment banking
short term maturities, liquidity, low default fisk
3 caracteristicas de mercados de dinero
1. discourage speculation in financial markets 2. prevent conflict of interest and self dealing 3. restore confidence in the safety and soundness of the banking system *the most important reason for this act was the fear concerning bank safety and the desire to prevent bank failures *
3 objectives of GLass Steagall act
denomination divisibility, currency transformation, maturity flexibility, credit risk diversification, liquidity
5 basic intermediation services financial intermediaries perform
realized real rate of inflation
= i (observed nominal rate)-actual rate of inflation during loan contract (change in P)
spread on the repo: yrepo=
=(initial selling price+interest)-sale price of the security/ (sale price of the security) * 360/days to maturity
governments can finance their expenditures
=T + change(B) =taxation + sale of bonds(incurring debt)
discount yield, bank discount yield
=discount amt/FV *(360/days to maturity)
default risk premium
=i-i(rf)......the promised yield to maturity on the security - the yield on a comparable default free security
required reserve ratio
=k * DEP where k is the rr ratio and DEP is the total deposits held by bank
GDP
=the quantity of good and services produced * the price of goods and services produced , thus it can increase if the quantity or price increases
Treasury notes and bonds
are similar to t bills in that they are issued by the U.S. treasury and are free of default risk ...however they are COUPON issues and longer maturities than a year
deficit budget
expenditures for the period exceed revenues these economic units need to borrow money and are called deficit spending units , businesses are the principal DSU
economic, technological and regulatory
as a a result of these 3 forces, there is a trend for borrowers to place debt directly with investors and to do fewer transactions with intermediaries such as commercial banks
increase, decrease, increases, increases, increase
as business spending increases, exports _____________, imports_______________, consumer spending _____________ and residential construction ________________ and we observe an ___________ in nominal GDP
jumbo CD's
as few negotiable CD's have denominations less than $1 million they are often known as _______________
quantity
as interest rates rise, the __________of loanable funds supplied to the market increases
close together
as money market instruments are usually viewed as close substitutes for each other, when investors are confident that all instruments have low credit risk and high marketability, interest rates will move _____________
increase, decrease
as prices _____________ with inflation, the value of money _____________
declines, rises
as the market rate of interest, yield, rises, a bond's market price _________________....as the market rate of interest or yield declines, a bond's market price _____________
cash value
as the policyowner overpays the cost of mortality in early years, a savings reserve called the _________ develops ...insurers pay interest on it and the _______________increases because of a survivorship benefit that is added each yer
drawdowns
as the private equity manager finds investments, the limited partners' commitments are drawn down,
decreases, increases
as unemployment _____________, inflation usually ____________________
mortgage backedsecurities
__________________ pass through all or part of the principal and interest payments on "pools' of many mortgages to buyers of the MBSs...this reduces illiquidity risk and payment uncertainties assoc. with the ownership of individual mortgages as well as interest rate risk and or credit risk
discount rate
at first, the Fed used to change the ___________ as the primary way in which the Fed attempted to affect national monetary policy
blue sky laws
at the state level, states securities laws, called _____________________ laws, required that sec be registered and meet state standards
self regulatory bodies
extensive private regulation by __________________ of the capital markets has developed to supplement public regulations of those markets
market economy,price movements
consumers have the free choice to buy or not to buy whatever goods or services they want . _________________ up or down, signal to producers what consumers want by reflecting changes in demand
convertible bonds
___________________--are bonds that can be converted into shares of common stock at the discretion of the bondholder ....these usually have lower yields and usually include a call provision so the bond issuer can force conversion by calling the bond rather than continue to pay coupon pmts on a security that has greater value on conversion than the face amt f the bond
buyout firms
_____________________take public companies and make them private companies, so they have direct control over management and strategy ...the largest private equity deals are usually this type
monetary base
C+TR currency in circulation + total reserves =
dealers
_________________help link the nation's money and capital markets together
venture capitalists
________________often think of their required rate of return in terms of multiples of the amount of money they invest in a company
expansionary fiscal policy
_______________is defined as an increase in government expenditures and/or a decrease in taxes that causes the government's budget deficit to increase or its budget surplus to decrease
duration
_______________solves the problem of knowing whether maturity or coupon rates affect price volatility of bond more....because it provides a rank ordering of bonds the dimesnion of interest rate risk exposure
foreign corporations
______________issue securities in the U.S. through private placement market
1. strengthen fiduciary responsibilities 2. est. reporting and disclosure req 3. provide for insurance o the retirees' pension benefits in event of default or termination 4. self employed persons can make tax deferred pension contributions
ERISA provisions
margin trading
______________simply means that the investors can buy securities partly with borrowed money
widen, narrow
Default risk premiums tend to _____________ during periods of economic decline and ____________ during periods of economic expansion
minimum funding standards
ERISA est. _____________for the funding of benefits under qualified plans
cash items in process of collection CIPC
_____________are items the Fed Reserve is clearing but have not yet obtained funds , this number is large
convertible preferred stock
_____________can be converte into common stock at a predetermined ratio....an investor can obtain a good dividend return plus the possibility that if the C/s increases, the value of the convertible stock will also increase
90%
FHLB, fannie mae and freddie mac account for over ____________ of the total amount of outstanding federal agency debt
capital
Fed _____________--- represents money paid in by banks that are members of the Fed Reserve system, member banks, to purcahse stock
14
How many years are the terms of the Board of governors? , incoming presidents can appoint only 2 governors in their 1st four year term
securitization of risk
_____________means that insurable risk is transferred to the capital markets through the creation of a financial instrument such as a catastrophe bond, futures contract, or options contract ...this increases the capacity of the industry , opens the door for other capital market participants to share risk
rates
____________are based on the likelihood of loss for a given risk
dealer markets , ask ,bid
____________eliminate the need for time consuming searches for trading partners because investors know they can buy or sell immediately at the quotes given by the dealer : dealers earn their revenue by selling securities at an _____________ price greater than the __________ price they pay
states
____________regulate the types and quality of investments that insurers make and establecer the max percentage of total assets that can be invested in certain instruments Ex: life insurers are limited in the percentage of total assets that can be invested in common stocks
negotiable CD's
____________were designed to recapture lost corporate deposits by allowing commercial banks to pay competitive interest rates for short term funds
life inusrance
___________insurance contracts are long term in nature and the assets backing these products are also long term. So insurers protect themselves from el riesgo desde la tasa de interes a traves the large spread between the rate of return earned on invested asssets and the guaranteed rate of interest credited to the cash value
portability
___________is the workers' right to take pension benefits with them when changing jobs
deficit spending units, ssu's
___________issue financial claims to financial expenditures in excess of their current income....while ______________ supply loanable funds to the market
guaranty funds
in the regulation of liquidation of insurers: all states have -that pay the claims of insolvent property and liability insurers
inflation rate is below the target rate
in this situation, the Fed is likely to lower interest rates by the open market purchase of Treasury securities, increasing the money supply
M2
M1 + savings deposits + money market deposit accounts + overnight repurchase agreements + Eurodollars + non-institutional money market mutual funds + small time deposits =
inflation
a continuous rise in the average price level ....
inflation rate is above the target rate
in this situation, the Fed is likely to raise interest rates by the open market sale of Treasury securities, reducing the money supply
dealer
NASDAQ remains a _____________market, there are multiple dealers willing to buy and sell a stock, members can enter orders in the NASDAQ system that are executed against other orderes in the system
farm credit sysem
a cooperatively owned system of banks and associations that provides credit and related services to farmers and agricultural cooperatives ...holds about 1/4 th of farm debt in U.S.
balanced budget
income and expenditures are equal
privately issued pass throughs
PIPS, issued by private institutions or mortgage bankers, which pool mortgages, obtain private mortgage insurance, obtain ratings for the security issue, and sell the securities using underwriters' services to compete for funds in the bond markets
surplus budget
income for the period exceeds expenses, called surplus spending units , households are the principal SSU
stock insurance company
a corporation owned by its shareholders: the most popular form of org used in the insurance industry in the U.S. : goal : max value of the firm
risk free rate
T-bills have almost no default risk, thus are referred to as ______________-
current income
TIPS may not be a good choice for investors looking from significant __________ from their investments as their coupon rates are lower and the increase in the principal due to inflation is taxed every year
lower
a dealer who has completed many purchases and has a large inventory may _____________ his or her ask price to reduce inventory
increase, decresase
a decline in the level of interest rates can be caused by either an ____________ in supply or a ____________ in demand for loanable funds
home equity loans
created so that homeowners can borrow against the equity they have accumulated in their home ...often used for debt consolidation , home improvement, education and emergencies
securities have no readily available market price, less liquid, smaller group of potential investors compared to public market
disadvantage of private placements
zero coupon approach
a possible approach to dealing with interest rate is to invest in a zero coupon bond that matures in 2 years. This eliminates price risk b/c the bond is held to maturity, and it eliminates reinvestment risk because there are no coupon pmts to reinvest ----assuming default free bonds, there is no risk in this strategy
economic growth
a rising standard of living as measured by output per unit of input
excess reserves
a risky environment or a higher interest rate paid by the Fed on them is what encourages banks to increase its holdings of -__________________- at the FEd
commercial paper
a short term promissory note historically issued by large corporations to finance short term working capital needs ...main reason firms use is this to achieve interest rate savings as an alternative to bank borrowing
industrial development bonds
a subclass of revenue bonds originally used to help stimulate local businesses in great depression....the municipality gives its approval for sale of bonds and assumes no legal liability in event of default
bridge finacning
a temporary loan until permanent financing is obtained
negotiable certificate of deposit
a time deposit issued by a bank or a thrift institution such as a savings bank that is negotiable...can be traded in the secondary market before maturity ...maturity suele of 2-6 semanas
zero coupon bonds
a type of OID, original interest discount security, that have no coupon pmt but promise a single pmt at maturity...the interest paid to the holder is the difference between the price paid for the security and the amount received on maturity
mutual insurance company
an insurer that is owned by its policyholders, no stockholders : the owner and customer functions are merged into a single group of claim holders : objective: para minimizar la cuesta de seguro to the policyowners ....algunos dividendos que ellos reciben no son subjetado a los impuestos
property
an insurer's loss exposure in ____________insurance is easier to predictthan its liability loss exposures because it is generally not difficult to determine the value of the property damaged or destroyed
allocative function
interest rates serve an ______________ in our economy by moving funds between surplus spending units and deficit spending units
equals
inthe secondary market, the number of shares sold equals the number of share bought
discount basis, use DISCOUNT yield equation
like Treasury bills, commercial paper is sold on a _____________ basis, it pays no coupon interest
limit buy order, sell
an investor may use a ________order in an attempt to buy on a price dip or a limit ___________ order in an attempt to maximize profits y selling on a price increase
shortern
distinguishing repurchase agreements is that they may be used to _______________ the actual maturity of a security to meet the needs of the borrower and lender
increase
Total transaction deposits in the banking system - when a bank uses some of its excess reserves to make a loan
TAAPs
Treasury automated auction process, a computer application that processes all submitted bids and prepares a summary data file of the auction results ...institutions submit bids via internet ....it reduces the amount of time that bidders are exposed to uncertainty with respect to changes in interest rates....lowers government's borrowing costs
TIPS
Treasury securities issued at a fixed rate of interest but with a principal adjusted every 6 months based on changes in the Consumer price index...at maturity, the bonds are redeemable at their inflation adjusted principal of their face value, whatever is greater ...have lower yields than traditional kind b/c of inflation protection`
unsystematic risks
diversification works because _________________of different securities tend to partially offset one another in a portfolio
depreciation and RE
business firms supply loanable funds through _______ and ________________
double taxed
dividends are paid out of the firm's after tax cash flows, thus since dividend income is taxable for most investors, corporate rate profits are _______________
excess reserves
When the FEd changes either the monetary base or reserve requirements, the money supply will usually change in a predictable way because the banks are economically motivated to minimize their holdings of ___________, because the Fed usually pays little or no interest on reserves
interbank
_______________ borrowing and lending make up the majority of federal funds transactions ...essentially 1 day unsecured loans between banks
bond price volatility
_______________ can be measured as the percent change in bond prices for a given change in interest rates
real GDP
_______________ growth occurs when the quantity of goods and services increases
securitization
_______________ involves setting up a trust that buys a large number of loans of similar types , the trust can then sell securities of dif. types that "pass through" pmts of principal and interest on the loans to the investors and may even vary the pmts on dif securities as interest rates go up or down
money market mutual funds
_______________-are investment funds that pool funds from numerous investors and invest money in money market instruments ....low default risk and much liquidity so give investors check writing abilities and can be viewed as an alternative to bank deposits
nonbank
________________ financial institutions have become active in fed funds rate with fed regulations requiiring commercial bank funds to have una reserva requerida
higher, internal
________ interest rates stimulate business to finance investments out of ____________sources (RE etc) rather than by issuing new debt or equity
financial institutions
_________ have the largest asset and liability holdings of any capital market participant
fiscal policy
_________ is the control over government spendingand taxes by a central government to stabilize the economy's output over the business cycle
exchange rates
__________ determine the value of hte dollar relative to foreign currencies
long, short
__________ term bonds have a greater price volatility than __________term bonds
fiscal policy
__________ was Keyne's solution to the Great depression, it focused on directing government spending into troubled areas of the economy or areas where there was a need for investment and development
higher
__________- borrowing costs reduce the level of business investments in plant and equipment, cause state and local governments to postpone capital expenditures, and reduce consumer installment purchases
reserves
___________ are also useful for the Fed to control the nation's money supply as depository institutions are required to hold a certain amount of reserves at the Fed Reserve bank determined by the amount of transaction deposits their customers hold at their bank
deflation
___________ is not common and when it occurs, it is usually during a deep or long rcession
smaller
___________- banks often accumulate large balances of fed funds to sell the excess to the larger correspondent banks with which they have relationships with
cash drains
____________ cause a "leakage" between the change in the monetary base and the change in banks' holdings of actual reserves ....reduces the actual reserves that banks have
contractionary fiscal policy
____________ is defined as a decrease in government expenditures and/or an increase in taxes that causes the government's budget deficit to decrease or its budget surplus to increase
federal insurance, federal agencies, and private insurance
____________, _______________ and -___________________ now guarantee repayments on mortgages to reduce investors' credit risk
Social security old age benefits
_____________-are financed through a payroll tax on employers , employees and the self employed . retirement benefits are paid to those workers who have earned enough credits under the system through paying the payroll tax
underwriting
______________, or bearing price risk, is the process where hte investment banker guarantees to buy the new securities for a fixed price : the risk exists between the time the investment banker purchases the securities from the issuer and the time they are resold to the public
monetarist economists, monetary supply
___________led by the American economist Milton Friedman, believe that a change in the money supply will alteraggregate spending and gross national product a predictable amount ....when people have more to spend relative to their needs, they spend more freely and thus stimulate the economy directly . thus the fed funds rate and other short term interest rates serve primarily as a signal or guidepost as to how monetary policy -thus the ___________- as measured by the monetary base is what drives changes in the level of econ activity in the economy
individuals
__________are the largest purchasers of munis
pensions
_________are used to protect against the risk of superannuation, outliving your ability to earn a living to support yourself
pensions, railroads
_______collect small contributions from many employees or larger contributions from employers, the plan pools these and makes large blocks of funds available to purchase stocks, bonds, real estate related investments and other securities ..the earliest pension plans were est by the ____________
Separate Trading of registered interest and principal of securities (STRIPS)
a Treasury security that has been separated into its component parts, each interest pmt and principal pmt become a separate zero coupon security
liquidity trap, horizontal , liquidity trap
a __________ results when the demand for money becomes infinitely elastic, the demand for money curve becomes _____________ and further injection of money into the economy has no effect because interest can go no lower. Thus if an economy enters a ____________, further increases in the money supply cannot lower interest rates and stimulate economic output
elastic money supply
a ___________ was achieved by authorizing the Fed reserve banks to issue a new type of banknote, the Fed reserve note ...member banks of the fed bank system could obtain fed reserve notes whenever they needed extra currency
rising, less reduces , increased
a ____________ value of the dollar means u.S> dollars buy more foreign goods abroad but foreign currency buys fewer goods in the U.S. . Thus U.S. firms are __________ competitive abroad and this __________ exports. However imports are _______________ because they become less expensive
financial crisis
a _____________ occurs when there is a severe shock to the financial system that disrupts its ability to function normally , to channel money to the most productive investment opportunity
central bank
a _____________ regulates a nation's money supply and financial institutions in an attempt to provide the nation with a stable economic environment and an effective payment system
stock insurer
a ___________________ must meet min capital and surplus requirements of the state in which its domiciled : are popular in the property and liability insurance industry (esp in commercial ines)
sinking fund
a ____________________fund provision requires that the bond issuer provide funds to a trustee to retire a specific dollar amount, face amount, of bonds each year ...the trustee may retire the bonds either by purchasing them in the open market of by calling them if a call provision is present
brokered market
a __________________has the disadvantage that it cannot guarantee that investor orders will be executed promptly , creating price risk
repo
a ______________is just a loan that is secured by a money market instrument of the same or larger dollar value ...if the borrower defaults on the loan, the lender keeps the collateral, a ST treasury security --the interest paid to the corporation is the difference between the purchase price and the repurchase price of the collateralized security
eurobond
a bond denominated in a currency dif. from the currency of the country where it is issued ...this is a way for large well known U.S. borrowers to obtain dollar financing from foreigners who were willing to buy the issuer's bonds and might offer better financing terms than the issuer could obtain in the U>S
weighted average
a bond portfolio's duration is equal to the _______________ of the individual bond durations
similar bond
a bond that is a close substitute for another, nearly identical in maturity and risk
merged
a failing large bank is usually _________________ with another bank and uninsured depositors rarely lose any money
cost of capital
a firm's _______________ is the minimum acceptable rate of return on capital projects
Fannie mae
a housing credit agency that was initially made to buy federally insured mortgage loans ...objective is to provide a secondary market for home mortgages
annuity
a life ______________purchaser pays the insurer a premium for hte annuity, and in return the insurer promises to make periodic payments to the annuitant until he or she dies =annuities can be purchased through installment premiums or through a lump sum purchase: the benefit pmts can begin immediately or can be deferred to a later date
duration
a measure of interest rate rate risk (bond price volatility) that considers both coupon rate and maturity is _______________....it is the weighted average of the # of years until one receives all future cash flows
private placements
a method of issuing securities in which the issuer sells the securities directly to the ultimate investors ...because there is no underwriting in a private placement deal, the investment banker's role is to bring buyer and seller together , help determine a fair price for the securities, and execute the transaction
ARM , adjustable rate mortgage
a mortgage with an interest rate that adjusts periodically in response to changes in market conditions...typically structured so that there is an initial interest rate that remains fixed for a period of time ranging from 1 yr to 10 yrs ...reduces lender's interest rate risk
once, individual
a multiple line policy is underwritten___________whereas separate policies require _____________underwriting and individual issue costs
the circumstance, as stated by Fisher equation where negative interest rates would occur, you would pay someone to take your money
a negative nominal interest rate occurs when the expected rate of deflation (-) exceeds the real rate of interest
preferred stock
a popular vehicle for investing startup companies is -_________________that carries the right to purchase or convert into common stock ...have priority over common stockholders in liquidation proceedings
frictional unemployment
a portion of those who are unemployed but are in a transition between jobs
coinsurance
a type of loss sharing provision is simple loss sharing after the deductible has been satisfied
la prestamista de unica instancia
a way that the Fed stabilizes the bank system, in its role as ________________, by providing massive massive amounts of liquidty, bank reserves, to depository institutions when any economic or political issue threatens the integrity or safety of the banking system
federal level
accrued interest on stripped securities is taxed every year at the _____________- in the U.S. even though no cash will be received until maturity
less costly, don't have to register with SEC, issuers do not have to reveal confidential info , fewer investors means the terms are easier to renegotiate
advantages of private placement
marketability
affects the interest rate on securities, it refers to the cost and quickness with which investors can resell a secuirty...the greater the ____________ of the security, the greater the demand for it and the lower its yield....all other characteristics like maturity held constant
mortgage bankers
aka mortgage companies, are private firms that originate mortgages and collect pmts on them
reserves
all banks and other depository institutions by law must hold deposits at the Fed. Reserve banks, and these deposits are given the name _______________
cumulative voting
all directors are elected at the same time and shareholders are granted a number of votes equal to the number of directors being elected times the number of shares owned: this gives minority shareholders a voice ...as they ae guaranteed that they will be able to elect the largest percentage of the directors that is less than the percentage of shares the minority controls
transaction costs
all fees and commissions paid when buying or selling securities such as search costs, cost of distributing securities to investors, cost of SEC registration and the time and hassle of the financial transaction...the __________ the transaction cost, the more likely it is that a financial intermediary will provide the financial service
Model Bill on POlicy loan rates
all states have enacted insurance legislation called _____________that allows life insurers to use a variable policy loan tied to a market interest rate
Financial Services Modernization act 1999:Gramm Leach Bliley Act
allows commercial banks, investment banks and insurance companies to affiliate with each other as part of a financial holding company organizational structure ...with this act large commercial banks are now able to freely enter into investment banking
negotiated offering procedures
almost all corporations that have a real choice between competitive vs direct negotiation use
increase, increases
an __________ in the money supply also tends to cause a decline in the value of the U.S. dollar against foreign currencies and the cost of imported goods ____________ for u.S. consumers ad the demand of imports declines
asset bubble
an ____________ is formed when the price of assets is overinflated due to excess demand. It usually occurs when investors flock to a particular asset class such as real estate or tech stocks, with belief that they can earn higher than normal returns ...often driven by low interest rates and a credit boom
all risk coverage
an alternative to naming perils is to provide _________________, insures against all losses except those that are excluded and not covered
maturity matching approach
an approach to deal with interest rate risk: invest in a coupon bond with a maturity equal to the 2 year holding period...eliminate pricerisk with holding bond to maturity but there is reinvestment risk because coupons are received
inflation targeting
an economic policy where a central bank estimates and makes public a projected or target inflation rate, and then steers the actual rate of inflation in the economy toward the target rate, through use of monetary policy tools
increase, decrease
an increase in the level of interest rates may be accomplished by either an _____________ in the demand or a ________ in the supply of loanable funds
decline
an increase in the supply of loanable funds causes a ___________ in interest rates in financial markets as well as a ____________ in lending rates at financial institutions
federal agency, Government sponsored enterprises
an independent federal department or federally chartered corporation established by Congress and owned or underwritten by the U.S. gov't ...the ones that are privately owned are known as ___________________
limit order
an order to buy or sell at a designated price or at any better price, it is a bid for, or offering of, securities
market order
an order to buy or sell at the best price available at the time the order reaches the exchange ...the buy order will be executed at the lowest ask price and the sell order will be done at the highest bid price
federal funds transaction
an overnight loan that is settled in immediately avaiable funds
tender
another name for bids, that must be received on the following Monday after each tursday
loss control
any effort to reduce the frequency and severity of loss
individuals
any tax exempt securities issued in excess of those desired by firms taxed at the full corporate rate must be purchased by _______________
plan fidiuciary
any trustee, investment adviser or other person who has discretionary authority or responsibility in the mgmt of the plan or its assets
whole life premiums
are a large source of funds for life insurers becase of the long term nature of the product and the cash values that accumulate ...the cash value from it accumulates tax free and is guaranteed by the insurer
Yankee bonds
are bonds issued by foreign entities in the U.S. denominated in U.S> dollars and must comply with the regulations imposed by the SEC Eurobond
mortgages
are loans for which the borrower pledges real property as collateral to guarantee that the debt will be repaid
deferred
b/c capital gains can be ______________, the present value of a capital gains tax is less than an equivalent amount of ordinary income tax
unsecured
b/c commercial paper is usually an _____________- promissory note, the issuer pledges o assets to protect the investor in the event of default , so only large firms of high credit standing issue CP
price stability
b/c it is so critical to the overall workings of an economy, ___________________ is the primary goal of the Fed and most central banks throughout the world
NOT
b/c most NCD's have denominations much larger than 250k, they are ____________ risk free instruments
put options
b/c the ________________ is an advantage to ivnestors, bonds that contain this sell at lower yields than comparable non___________
haircut
b/c the value of the collateral may fall, repos are usually overcollateralized through a +___________________.
call loans
back in the day, most bank loans were this type, which are loans that are due when the bank calls and asks for repayment...thus when business loans were called unexpectedly, many buisnesses failed b/c the had purchased with their loan money inventory and capital equipment that could not be converted quickly
federal funds
bank deposits held with the Federal reserve bank, banks with deposits in excess of required reserves may lend those excess reserves called _____________ to other banks
discount instruments
banker's acceptances like T-Bills, are _______________ with yields quoted on a discount basis ,they trade in round lots between 100k and 500k, with low default risk
net worth, liabilities
banks can protect their _______________ from interest rate risk by matching the average duration of the assets withe average duration of the __________________-
NASDAQ
because the __________________-is electronic, both orders and trades occur through a computer system instead of a physical trading floor , it has evolved into a major stock exchange where companies must meet listing requirements
short term or floating rate loans
before development of direct junk bond market, these firms had to rely on ____________ or ________________ from commercial banks
profit maximizers
being __________________ banks try to spend any excess reserves they hold by making more loans and buying investments that pay an interest return
competitive bids
bids made by large investors who actively participate in money markets on a regular basis such as Wall St. brokerage firms and large commercial banks ....the total of the bids by investor can't exceed 35%of the Treasury bills offered in the auction, so no singgle bidder can squeeze the market
Full Employment ad balanced growth act of 1978 , aka the Humphrey Hawkins Act
bill that commits the federal government to promoting high employment consistent with a stable price level
mortgage backed bonds
bonds are issued by city housing authorities based on mortgage pools generated under their jurisdiction ...interest paid on the bonds is tax exempt, so the issuer can borrow funds at low interest and then make low interest mortgage loans
convertible bonds
bonds that can be exchanged for shares of common stock, until conversion, are corporate debt:thus their interest and principal pmts are contractual obligations of the firm and must be made of the corporation will default : these bondholders have lower ranking claims than most other debt holders : although their claims rank ahead of stockholders
higher
bonds that contain a call option sell at a ____________ market yield than otherwise comparable noncallable bonds
shorter...this is because the higher coupon bonds receive more of the total cash flow earlier in the form of larger coupon payments
bonds with higher coupon rates have ____________ durations than bonds with smaller coupons of the same duration ....
less
bonds with interim pmts always have durations _____________ than their final maturity
liquidity premium, greater
borrowers whoseek long term funds to finance capital projects must pay lenders a __________________ to purchase riskier long term securities ....this factor increases as maturity increases because the longer the maturity of a security, the ____________its price risk and the less marketable the security -this premium is what causes the observed yield curve to be more upward sloping than predicted by the expectation theory
buy and hold
both market value weighted and price weighted indexes reflect the the returns to ________________ investment strategies
FINRA, Financial Industry Regulatory Authority
broker dealers that operate in the OTC markets are regulated by the __________________, a private self regulatory organization
store
brokers provide investors a convenient way to ____________their securities
adjustable rate preferred stock
dividends of this type of P/S/ are adjusted periodically in response to changing market interest rates
Treasury or Federal Financing Bank
other go't agencies get most funds from the ____________- or the __________________
market value weighted index
calculated by taking the total market value of the firms in the index and the total market value of those firms on the previous trading day...the % change in the total market value from one day to the next represents the change in the index ...do not require adjustments for stock splits etc because they do not affect market cap....DO require adj. when the composition of hte index changes
option contracts
call for one party, option writer, to perform a specific act if called onto do so by the option buyer or owner , can also be used to hedge risk
yield to maturity aka promised yield
can be solved for using bond's purchase price, this is the rate earned if all cash payments are received on time and bond is held to maturity
seed financing
capital provided at hte idea stage ...goes for product development and market research
in the real world, negative interest rate payments are not interest payments...they are cash payments made by investors for something of value they received
cash
-standardized denominations -issued by large well known borrowers -insured and highly collateralized -repayment sschedules
characteristics of mortgage backed securities
due diligence
checking the validity of all the important information the firm provided the potential buyers ...they potential buyers want to make sure that if a firm is purchased they get what they are promised
net payments
clearinghouses net out hte value of checks and transfers drawn on or received by each depository institution in the association and make only _________________ of the net balances due among members in the assoc. , saving much time and expense
mortgage servicer
collects and records mortgage pmts and calculates the portion of pmts that are from principal and from interest before passing the pmts on to the mortgage owner
agents
commercial banks remain important to the operation of the commercial paper market because they act as _____________ in issuing paper and provide backup lines of credit to corporate issuers of commercial paper
Financial Service Modernization Act1999
commercial banks were allowed to engage in more investment banking activities and vice versa
Patient protection and affordable care act
concerns over rising medical costs and the large number of people who were uninsured led Congress to pass the _________________, which extends coverage to many uninsured americans by providing subsidies to individuals and small businesses
1. large number of similar exposure units 2. losses occurring should be accidental and unintentional 3. losses must not be catastrophic 4. losses should be determinable and measurable 5. chance of loss must be calculable 6. premium must be affordable
conditions present before a private company can insure a risk
FOMC (Federal Open market committee)
conducts the nation's monetary policy
collateralized mortgage obligations
consist of a series of related debt obligations, called _______________, which divide up the principal and interest pmts made on a pool of mortgages and pay principal and interest to various investors according to a predetermiend schedule
reserves, vault cash
consists of all deposits held at the Fed and cash that is physically held in the bank's vault, called _______________
FOMC (federal open market committee), open market operations
consists of the 7 members of the Board of Governors of the Federal Reserve system plus 5 presidents of Fed Reserve banks ...the presient of the Fed Reserve bank of NY is a permanent member because it has a day to day responsibility of conducting monetary policy for the Fed system, done mainly through _____________________
repurchase agreement
consists of the sale of a short term security, collateral with the condition that after a period of time, the original seller will buy it back at a predetermined price, the collateral used is US Treasuries or agency securities
repurchase agreements
consists of the sale of a short term security, collateral, with the condition that, after a time, the original seller buys it back at a predetermined price ....
WIlshire 5000
consists of u.S. stocks and is a market value weighted index , has more common stocks than any other inex
1. consumer spending on durable goods aka like cars 2. consumer spending on housing (sensitive to interest rates)
consumer spending can be split into 2 parts
option
contract that gives the holder the right, but not the obligation, to buy or sell an asset at some specified price and date in the future
futures contracts
contracts for the future delivery of assets such as securities, foreign currencies, interest rates and commodities, can be used to reduce, hedge, risk exposure caused by fluctuation in interest rates, foreign exchange rates, or commodity prices
bond
contractual obligation of a borrower to make periodic cash payments to a lender over a given number of years
corporate managers, board of directors
control of the firm is in the hands of the -_________________who are supposed to act in the shareholders' interests, the shareholders exercise control over the firm through the election of a ___________________. these people represent the owners and monitor the manager's activities on shareholder's behalf
conversion yield discount
convertible bonds have lower yields than similar bonds without this option as it is an advantage to an investor during volatile interest rate periods...so this is the price investors are willing to pay for the conversion option
registered bonds
corp. bonds can be _______________for which the owner is recorded and pmt due is mailed to the owner
stability
corporate bonds are attractive to insurance funds and pension funds because of the _________________of the cash flows they experience and the long term nature of their liabilities ...they also are in lower marginal tax brackets and thus taxable corp bonds give them higher after tax yields
bearer bonds
corporate bonds can be ______________for which coupons are attached that the holder presents for pmt when they come due
junk bonds
corporate bonds with high default risk and low bond ratings
domestic , eurobond
corporate debt can be sold in the _________market or in the ___________market , the market for the debt issued by foreign companies and denominated in foreign currencies
universal banking system
countries where investment banking and commercial occur combined is called a ________________
financial guarantees
cover the pmt of principal and interest to investors in debt securities in the event of a default : monoline insurance companies or commercial banks provide most of these
Fannie mae
created to help lenders access capital markets as a source of funds for conventional mortgages
M1
currency + checking deposits=
full faith and credit
debt securities of government owned agencies are guaranteed by the ____________________ of the U.S. government and thus are as safe as U.S> treasury debt
industry profitability
demand for munis from property and casualty insurance companies is primarily determined by industry ________________and insurance companies' need to obtain tax exempt income
reverse annuity mortgages
designed for older people who own their homes and need additional funds to meet current living expenses but do not want to sell their homes , borrow against the equity in thir homes
call interest premium
difference in interest rates between callable and otherwise comparable noncallable bonds ---is the compensation paid to investors who own callable bonds for a potential financial injury in the event their bonds are called
market segmentation theory
differs sharply from the expectation approach, it maintains that market participants have strong preferences for securities of a particular maturity, and that they buy and sell securities consistent with these maturity preferences Ex: investors who desire the short term security determine the short term yield curve like commercial banks ...and likewise for intermediate and long term securities
treasury bills
direct obligations of the U.S: government and thus are considered to have no default risk, sold weekly with maturities from 3 mos to 1 year
straight voting
directors are elected one by one, the max number of votes for each director equals the number of share owned
1. changes to the discount rate affect the money only if bnks are willing to respond ...many banks are wary due to scrutiny from borrowing here 2. borrowing here is short term
disadvanages of manipulating discount rate for monetary policy
NO! the fed funds rate is a market determined rate negotiated between borrowers and lenders in the fed funds market
does the fed set the fed funds rate?
liquidity, inflation
drawing down FE's balance sheets ot levels pre crisis will require agility, if the asset balances are drawn down too quickly, the Fed may draw out important _________ out of the financial system and short circuit econ recovery if they take too long, could cause monetary expansion and thus ______________,
reserve deficiencies
during cyclical booms, banks have problem of _______________ b/c of heavy loan demand
falls
during periods of low interest rates or stable market conditions, many smaller companies of lower credit quality enter the capital markets and obtain financing by pucli sale so ratio of private placements to public sales fall
investing
during recessions, a major bank problem is ________________ extra reserves so they build up their secondary reserves with Treasury and govt agency securities
origination
during the _______________of a new security issue, the investment banker can help the issuer analyze the feasibility of hte project and determine the amount of money to raise, decide on the type of financing needed, design the characteristics of securities to be issued and provide advice on the best sale date so issuer can get highest possible price
Keynesian economists, increasing
economists that say that changes in the money supply have on the purchases of goods and services...instead they focus on the impact that changes in the level ..of interest rates have on spending in the economy ...when people and banks have more money, they tend to buy more securities and make more loans, driving down interest rates and __________credit availability
private placements
emerged as a distinct method of issuing securities because of the Sec. and Exchange Act 1934 which required publicly sold securities to be registered with the SEC...___________are exempt from registration and disclosure req b/c large institutional investors possess both the resources and the sophistication to analyze the risks of securities
not
empirical evidence shows that the stock market is ____________ very successful in predicting economic activity
preferred habitat theory
extends the segmentation theory and explains why we do not observe discontinuities in thei yield curve ...it asserts that investors will not hold debt securities outside their preferred habitat, maturity wise, w./out additional reward in form of risk premium -does NOT allows for discontinuities in the yield curve like the segmentation theory
insured pension plan
est with a life insurance company
Securities exchange act of 1934
est. the SEC to admin provisions of 1933 act, required firms with outstanding securities on secondary exchanges to periodically dissclose relevant financial info, the 1934 act est. the SEC as the admin agency responsible for broad oversight of secondary security markets
asset management
esta trabajo de los bancarias inversiones da un range ancho de informacion de inversion y da aviso a los clientes, desde guias para los acciones y bonos a reportes que contenga mucha informacion y sean escrito por una analista de los seguridades en una inversion particular
market yield
every time the __________________ changes, the duration changes
convention blank
every year, insurers must file a series of financial statements called a _______________with the commissioner's office in every state in which they operate ...an insurer hay que tener activos suficientes para poner a contra de los pasivos
1. measures the return on the MOST LIQUID of all financial assets 2. closely related to conduct of monetary policy 3. measures directly the availability of excess reserves within the banking system thus influencing commercial banks decisions concerning loans to their customers
federal funds `
unsecured
federal funds are different from repos b/c federal funds are ___________ loans therefore characteristics of borrower matter most
primary markets
financial market in which financial claims are first sold as new issues
secondary markets
financial market in which particiapnts buy or sell previously issued financial claims
direct financing
financing wherein DSUs issue financial claims on themselves and sell them for money directly to SSUs, the SSUs claim is against hte DSU not a financial intermediary
directly, indirectly
firms issuing commercial paper can sell it either _____________to investors using their own sales force or _________- using commercial paper dealers
financial institutions
firms such as commercial banks, credit unions, insurance companies, pension funds, mutual funds, and finance companies that provide financial services to consumers, businesses and government units ,...the main feature is that they invest their funds in financial assets such as business loans, stocks or bonds, rather than in real assets
investment banks
firms that specialize in helping businesses and governments sell their new security issues, debt or equity, in the primary markets to finance capital expenditures , then these bankers make a secondary market for the securities as broker s and dealers
investment banks
firms that specialize in helping businesses sell new debt or equity in the financial markets as well as brokerage servies for securities that have been issued
Treasury dept
fiscal policy is for the most part carried out by the ___________, which was established by an act of Congress in 1789 to manage the government's finances
variable life insurance
fixed premium life insurance that permits hte policyowner to invest the cash value in a mutual fund offered by te insurer; no cash value guarantees
brokered
for a commission fee, brokers will find compatible trading partner s and negotiate acceptable transaction prices for their clients : b/c they are in contact with market participants, they know what constitutes a fair price for a transaction
term to maturity
for bonds with a single payment (principal with or without a coupon pmt) duration is equal to ________________aka zero coupon bonds holds true for this concept
banknotes
from 1832-1914, the U.S. didn't have a central bank, instead individual banks issues ___________ that served as the nation's money supply . These were IOUs (liab) of individual banks that looked and functioned like our present day currency
independent
from studies, ____________ central banks are best at controlling inflation
noncontributory plans
funded through employer contributions only
derivatives securities
futures and options often known as this because they derive their value from some underlying asset
expected yield
given prediction of the future price, the investor can calculate an ____________ that reflects the expected sales price
GNMA, Ginnie mae
given the charge of expanding affordable housing by helping lenders access capital markets as a source of funds for govt guaranteed mortgages , provides guarantee for mortgage backed securities issued b approved lenders
security services
gives a number of services to instituional investors and very wealthy individual investors
Civil War
golden era for investment banking started after the ______________where investment houses acted as intermediaries between the railroad firms
government sponsored
government __________________ agencies are NOT explicitly guaranteed by the federal government against default , however some form of federal backing is implied
cannot stock
government units cannot issue ___________ because they are not allowed to sell ownership in themselves
underwriter's spread
gross proceeds-net proceeds: this compensates the investment banker for the expenses and risks in the offering
decreasing term
has a face amount that decreases yearly or monthly although the premium stays at the same level
underwriting cycle
has been observed in commercial property and liability insurance: property and liability insurance markets fluctuate between periods of high premiums and tight underwriting standards (hard insurance) and periods of low premiums and loose underwriting standards (soft insurance market)
balloon pmt mortgages
have a relatively low fixed rate of interest for a predetermined period of time , 7 years us. , the remaining balance of the mortgage comes due at the end of that period in the form of this
prime broker
hedge funds use these, for example, these brokers lend money and securities to the hedge fund , also clears trades and retrains custody of the securities on behalf of the hedge fund
brokers
help bring buyers and sellers together, like machmakers, if sale occurs, receive commission, never own securities they trade
inflation
high rates of _____________ create uncertainty in the economy, making it difficult to plan or to make long term investment decisions.The result is that the economy grows at a slower rate than it otherwise would
nonfinancial
highly rated issuers of ________________ commercial paper felt the impact of the crisis the LEAST, this segment of the commercial paper market is the smallest
increase
holding everything constant, an ______________ in the monetary base leads to an increase in the money supply
interest rate
housing investments are particularly sensitive to the changes in _________________ because of the large size and long maturity of mortgage debt obligations
1. substantial control over mgmt decisions, protections against downside risks, share in capital appreciation
how venture capitalists differ from public equity investors
negative stop out yield, 0
if a TIPS auction for a new issue has a _____________stop out yield, then the CR is ______________...investors will not have to pay interest to the Treasury
public offering
if a company decides to make a ________________, it must decide whether to have the issue underwritten or sold through a best efforts offering
1. borrow reserves at Fed window 2. let loans run off til the bank is in compliance, not renewing loans as they mature
if bank is not in compliance with required reserves, a negative reserve position, they have 2 options
unexpected
if borrowers and lenders do not adjust the loan contract to address the impact of expected price level changes, there can be ___________ transfer of purchasing power between them
G=T
if expenditures equal taxes, the govenment is in a balanced budget position and __________
surplus, retired
if government expenditures are less than tax revenues, the budget is in a _________ position and bonds can be ___________
G>T, deficit, sold
if government expenditures exceed tax revenues, the government is in a _____________position and bonds must be ___________ to balance the budget
lower
if interest rates are expected to be high and reinvestment is expected to be large, a __________rate is charged and vice versa
call
if interest rates decline significantly below the CR on a callable bond, the issuer can ____________ in the old bond issue and refinance it with a new one at a lower interest rate : the investors is now forced to reinvest funds at the current lower market rate of interest, suffering a loss of interest income
initial public offering
if it's the first time the company has offered a particular type of security to the public, the primary offering is called an unseasoned offering or an _____________________
debentures
if no assets are pledged, the bonds are secured only by the firm's potential to generate cash flows
flat
if no change is expected infuture short term interest rates, the yield curve is ________________
raises
if the Fed _____________ the discount rate, banks are less inclined to borrow at the discount window. Thus they make fewer loans or reduce their investments so they can repay their loans from the Fed, reducing the amojunt of reserves in the banking system, and thus the money supply
increase, increase
if the Fed decides to _____________ the reserve requiement, the req. reserves held by banks increase and the quantity of reserves demanded therefore must __________________ at any given interest rate
increases, increasing
if the Fed funds rate ______________, banks borrow more from the FEd , ____________ the amount of reserves in the banking system
unseasoned offering or an IPO
if the company has never offered securities to the public, the primary offering is called an ___________________
seasoned offering
if the firm already has similar securities trading in the secondary market, the primary issue is known as a ____________________
seasoned offering
if the firm releases new issues but already have similar securities trading in the market, the primary issue is called a _________________
put option
if the holder has the right to sell the underlying security
call option
if the holder of the option has the right to buy the underlying security
downward sloping
if the market expects future short term interest rates to decrease, the yield curve is ______________-
conversion option
if the option holder has the right to convert the security into another type of security
, increased, decline
if the reserve requirement is decreased, the amount of excess reserves in the banking system is - , causing the fed funds rate to __________________
registration statement , preliminary prospectus
if the securities are to be sold publicly, security laws require that a __________________is filed with the SEC , the _____________contains detailed info about the issuer's financial condition, business activities, industry competition, mgmt and their experience, the project for which the funds will be used and the characteristics of the securities to be issued and the risks of the securities
flat curv
if the yield curve is like this, it means investors to not care about the maturity of their investment because the YTM is regardless
deflation
if there is ______________ over the life of the loan contract, the realized return is always a positive number and greater than the nominal interest rate (the expected return at the time the loan was originated)
halt trading
if there is a dramatic increase in uncertainty in the financial sector or the economy can literally _______________ trading or lending b/c adverse selection and moral hazard problems son extreme
full employment
implies that every person of working age who wishes to work can find employment
book entry
in 1976, the Treasury began switching the entire market portion of the federal debt over to _____________ securities in lieu of paper
interest
in 2008, the Fed has paid _________________ on required and excess reserve balances of depository institutions
Emergency Econ Stabilization Act
in 2008, this provided 700 billion in bailout of the U.S. financial system in acquiring distressed assets from banks, esp. mortgage backed securities and to make capital injections into banks
securitizing
in __________________ a pool of loans, separate claims on both the principal and interest pmts on the loans can be sold to different people
short sale , margin
in a ____________,the investor can borrow shares form her broker and sell them today, promiing to buy them back later, the investor must keep sale proceeds along with a security deposit , the ________________on deposit with the broker
asymmetric information
in a bank panic, the source of the contagion of the simultaneous failure of many banks is due to ________________
return on real assets, positive time prefrence
in a classical economic system, interest rates are determined by the ____________ and by society's _________ time preference
highest bidder, lowest
in awarding treasury bills, the ____________ bidder, the one who submits the ___________ interest rate, receives the first allocation of t bills and subsequent bids are filled in decreasing order of price until all the bills auctioned that week are distributed
1. origination 2. underwriting (risk bearing) 3. distribution
in bringing securities to market, investment bankers take clients through 3 steps:
convex
in describing the price yield relationship graph, it is _____________, it curves away from the origin of the xy axes
selling price
in handling m&A the bank receives a fee based on a % of the -____________
within
in not being immune from electorate desires and political process, the Fed reserve system is independent ________________- rather than independent of the federal govenrment
public orders
in over the counter markets, ________________for purchase or sale are often executed by brokers acting as agents for their customers
reality
in reality, portfolio managers must adjust the duration of their bond portfolios on an ongoing basis so that the duration of their portfolio constantly matches their investment horizon
discount yield
in t-bill auctions, the rate specified is the ______________
asset backed commercial paper
in the 2007 crisis, the __________ of the money market instruments took first major hit, as their investments depended on being able to roll over the paper
expansive
in the Keynesian view, ___________ monetary policy usually stimulates the economy by reducing interest rates and increasing the availability of credit so people and businesses can borrow more inexpensively and thus spend more freely
liquidity trap
in the Keynesian world, monetary policy always work unless the economy is in a _________________, such as may have occurred during the Great Depression of the 1930s, when Keynes thought people already had so much money relative to their need that any extra money would be hoarded and would no longer drive down interest rates
negotiated sale, competitive sale
in the __________________the investment banker provides the origination and advising services to the issuer as part of the negotiated package vs in a ____________________, the issuer or an outside financial adviser performs origination services
private banks
in the early days, investment banks termed ___________, could engage in any business activity they wished and could have offices in any location , they could not issue banknotes but could accept deposits as well as underwrite and trade in securities
commercial banks, investment banks
in the indirect credit market, ______________are the most important participants vs in the direct market, _________________are the most important participants
noncompetitive bids
individuals , small corporations and small financial institutions usually enter this type of bids
Freddie Mac
initial purpose was to assist savings and loan assoc. and other mortgage lenders in attracting capital market funds and provide competition for FNMA
government lending programs, housing and agriculture
initially _______________--- were designed to attract private capital to sectors of the economy where credit flows were considered insufficient ...______________and ___________________were the principal beneficiaries of fed credit programs
freddie mac
initially est. to buy conventional not federally insured mortgages
financial intermediaries
institution that issues liabilities to SSUs and use the funds so obtained to acquire liabilities of DSUs
universal banks
institutions that can accept deposits, make loans, underwrite securities, engage in brokerage activities, and sell and manufacture other financial services such as insurance
add on instruments
instruments sold at par value and pay par value plus interest at maturity Ex: negotiable certificates of deposit, federal funds, repurchase agreements
underwriting
insurance companies also reduce risk, besides law of large #'s, by doing this: it's the selection and classification of insurable risks....reviewing applications and deciding which applicants are acceptable
states
insurance companies are regulated PRIMARILY by the ___________in which they do business
law of large numbers
insurance companies use this principal that states as the number of insured risks increases, the deviation between actual and expected results declines
underwriting categories
insurers use ________________to group similar risks
NOT
interest on all US Treasury securities is _____________ taxable at the state and local levels
interest only mortgage
interest paid for the first 3,5,7,10 years , after the interest only pmts the pmts increase so that the loan is fully amortized by the end of the 30 yrs
price risk
interest rate changes cause the market value of a bond to rise or fall, causing a CG of CL to ivnestor
SIPC, Security Investor Protection Corporation
investors are protected against loss of the securities or cash held by brokers by the ________________________...it does NOT guarantee the dollar value of securities but that securities se mismos regresaran al dueno
rising
investors usually exercise put options during periods when interest rates are _____________, prices are declining ...this sets a floor, or minimum price of a bond at the exercise price...generally at or below par value
retail sales
involve selling the securities to individual investors and firms that purchase in small quantities
open market operations, FOMC
involve the buying and selling of governemnt securities through the trading desk at the Fed Reserve Bank of NY...it is the most important policy tool the Fed has for controlling the money supply ... the ________________ is the focal point for setting monetary policy at the Fe and meets 8x a year
reverse repurchase agreemnts, reverse repo
involves the purchase of short term securities with the promise to sell the securities back to the original seller ata predetermined price at a given date in the future
institutional sales
involves the sale of a large block of securities to institutional purchasers like pension funds, insurance companies, endowment trusts, or mutual funds
stop buy order
is analogous to a stop loss order except for a short sale...an investor who is short a stock can submit this to purchase the stock if its price rises to a certain level
universal life insurance
is flexible premium, nonparticipating life insurance that provides a market based rate of return on the savings or cash value account ...the interest rate paid by the insurer fluctuates with changing interest rates : this type of insurance offers lifetime protection, competitive interest rates and deferred taxation
Treasury Bills
issued by the federal government to cover current deficits , and to refinance maturing gov.t debt...sold regularly through an auction process
rare
it is rare for any corporation to have an international credit rating higher than that of its home country b/c govts soemtimes restrict currency flows out of their countries or cause companies to default on their debts
marginal tax rate
it is the ________________of the last investor that determines the relative rate relationship between comparable tax exempt and taxable securities
demutualization
la manera que mutual life insurance companies have gone public, converting them a las organizaciones de accion por un proceso se llama _______________
prestamos adicionales valores
la manera que the Fed, minimiza la reserva excesa: por haciendo ______________ o comprando _____________ de "investment"
money center banks
large commercial banks located in major financial centers who are major participants in the money markets, like Wells Fargo , provides funds and business loans to large multinational corporations
negotiable certificates of deposit, NCD´s
large denomination time deposits of the nations largest commerical banks , may be sold in the secondary market before their maturity, not as popular
60%
large finance companies and bank holding companies account for ______________ of all commercial paper sold
lower
large money center banks are usually able to issue NCDs at _______________ rates than smaller regional banks due to their lower perceived default risk and greater marketability of prime name banks
1. measures return on the most liquid of all financial assets (bank reserves_) 2. closely related to monetary policy 3. directly measures the available reserves in the banking system, which in turn influences commerial banks' decisions on making loans to consumers, businesses or other borrowers
las razones para la importancia de the fed funds rate
limited liability
legally, C/S holders enjoy ________________, their losses are limited to the original amount of their investment
corporate bonds
life insurance companies and pension funds are the dominant purchasers of _______________________
superannuation
life insurance protects against the peri of premature death during the income earning years and against the risk of ______________, living too long, after retirement
excluded
losses that are unintentionally caused and perils where the intent is to destroy property like war, are __________from coverage under insurance contracts like catastrophic losses
less, more
lower duration bonds are exposed to _____________- interest rate risk and higher duration bonds are exposed to ____________
dealers
make markets for securities by carrying an inventory of securities from which they stand ready to either buy or sell at quoted prices , make profits by trading from their inventory and as a matchmaker
noninsured pension plan
managed by a trustee appointed by the sponsoring organization like business or union , the trustee is usually a commercial bank or trust company , which holds and invests the contributions and pays retirement benefits in accordance wth the terms of the trust
microcap stsocks, penny stocks
many _____________ and -trade through the 2 types of OTC markets
American Depository Receipts
many foreign companies overcome obstacles to gain equity capital from the U.S. by ______________which are dollar denominated claims issued by U.S. banks representing ownership of shares of a foreign company's stock held on deposit by the U.S. bank in the issuing firm's home country ...subject to U.S. securities laws
Pink OTC markets
many of the companies on this OTC market do not file reports or audited financial statements with the SEC
long term debt
many of the gov't agencies authorized to issue debt issue only ________________ debt, however as these issues approach maturity, they are traded in the money markets
50%
margin requirements are set by the Board of Gov.of the FEd reserve system and are currently ____________________of both equity and debt securities
reinvestment risk
market interest rates may change, causing the lender to have to reinvest coupon payments at interest rates different from the interest rate at the time the bond was purchased
Federal Reserve Act 1913
meant to correct shortcomings of the national banking system during the financial crisis of 1907: goals: 1. a monetary authority that would expand and contract the nation's money supply according to the needs of the economy 2. lender of last resort: that could furnish additional funds to banks in times of financial crisis 3. efficient payment system for clearing and collecting checks at par throughout the country 4. a more vigorous bank supervision system to reduce the risk of bank failures
1. retention 2. loss control 3. risk transfer
methods of dealing with these risks
1. business investment 2. consumer spending 3. net exports
monetary policy is thought to affect the economy through 3 basic expenditure channels
cash receipts and cash expenditures
money market instruments allow econ units to bridge the gap between _____________ and _________________
discount instruments
money market instruments that are sold at a discount to par value and pay par value at maturity : Ex: treasury bills, ST fed agency debt, commercial paper and banker's acceptances
preservation of their capital
money market investors are main concerned with the _____________of their capital and have little desire to take risks
the mainplayers in the commercial paper business
money market mutual funds, large insurance companies, nonfinancial business firms, bank trust departments, state and local government pension funds
open market transactions
money market transactions are also called _______________- transactions because of their impersonal and competitive nature
required reserves
more than likely the bank makes loans and expands deposits to the point where all of the excess reserves are again absorbed as __________________
not
mortgage loans are made for varying amounts and maturities depending on borrower's needs, thus with their lack of uniform size, individual mortgages are _____________readily marketable in secondary markets
real property
mortgage loans, uniquely, are always secured by the pledge of ________________, as collateral ..if a borrower defaults, the lender can foreclose and take ownership of the collateral
federal government policies
mortgage markets are both highly regulated and strongly supported by ________________________ policies
FHA mortgages
mortgages whose ultimate pmt is guaranteed by the Federal housing admin are called _________________ mortgges
fiscal agents
most agency securities in past were sold through financial specialists known as -...job was to assemble a group of investment banking firms to distribute the agencys securities to retail buyers
internal transactions
most banker's acceptances arise in international transactions between exporters and importers
term bonds
most corp. bonds are ____________which means that all of the bonds that comprise a particular issue mature on a single date
long term
most economists believe that the Fed cannot control the fed funds rate over the _______________ term ....without causing depression or inflation
dealers
most firms sell their paper through ______________ who maintain an inventory of the commercial they sell and stand ready to buy paper back from their customers at the going market rate plus 1/8th of 1% commission fee
captive insurance company
most fortune 500 companies have formed a subsidiary called a ___________who are formed for the purpose of insuring the parent company's loss exposures and provide direct access to the reinsurance market
private equity organizational structure, ocmmitments
most have a fixed life , set up as a limited partnership, begins with the manager raising ________________from investor who agree to provide up to a given amount of capital for the private equity capital investments needed
bank credit line
most investors do not buy commercial paper unless it is backed bby a ___________________ , banks receive a fee for this
secondary markets
most money market instruments have active __________________, as temprary investments must be highly marketable in the event that funds are unexpectedly needed before maturity
defined contribution plans
most plans started today are this type as they're easy for employers to admin and shift investment risk to the employee ...all the employer states is what is set aside for the employee ...employees decide where to invest their retirement funds
nonparticipating and cumulative
most preferred stock is: - __________________ means that the preferre stock dividend is fixed, it doesn't change regardless of how profitable or unprofitable the firm becomes...though firms can decide not to pay divs without going into default -______________________: the firm cannot pay a div to its c/s holders until it has paid those dividends it skipped to PS holders
street name
most securities in brokerage houses are registered in the broker's _________________...the security is registered in the broker' name in the issuer's records but broker keeps trac k that the investors is the ultimate beneficial owner
call provisions
most security issues with sinking funds have ___________because that guarantees the issuer the ability to retire bonds as they come due under the sinking fund retirement schedule
immediately available
most transactions are settled in ____________ funds , with the parties involved instructing the Fed Reserve to transfer from te account of one customer's bank to the other party's bank
NASDAQ
much of the motivation for the way the NYSE executes transactions can be attributed to increased competition from the _____________________, regulatory changes are also increasing competitive pressure on nYSE
serial bond issue
munis have min denominations of $5k and sold as _____________, which contains a range of maturity dates rather than all of the bonds in the issue having the same maturity date
Treasury Dept, securities dealers
new issues of notes and bonds are sold by the ____________ and existing issues can be purchased or sold in the secondary market from _________
primary offering
new issues of stock or bonds are called _____________-
real estate mortgage investment conduit REMIC
new mortgage backed security that was treated like a trust that couldpass through all interest and principal pmts
crisis
new regulations are often driven by a major financial ______________
par
newly issued notes and bonds trade very near ________immediately after auction
short term basis
on a _____________ basis, the Fed intervenes in the Treasury market to smooth interest rates )reduce their volatility)
toxic securities
on wall street, subprime mortgages were called ___________ b/c of their toxic effect on a firm's capital and ultimately its solvency
private placement
one of the 2 ways new corp bonds are brought to market: it is where bonds are sold privately to a limited number of investors
public sale
one of the 2 ways new corporate bonds can be brought to market: it is when the bond issue is offered publicly in the open market to all interested buyers
independence, not
one of the controversial aspects fo the organization of the Fed Reserve system is the issue of its _______________, it's not direclty under the authority of Congress or the president ....it is free from political and bureaucratic pressures in making monetary policy -the Fed does ____________ rely on Congress for funding
strengthen
one of the legislation' goals in 2010 was the ________-- large financial firms so they can better withstand financial stress and control their growth , as being larger, their failure poses a greater risk to the financial system
stabilize
one of the major responsibilities of the Fed Reserve is to __________ the financial system as disruptions to the system can inhibit the ability of financial markets to channel funds efficiently between surplus spending units and deficit spending units
trading desk
open market operations, the buying and selling of U.S> treasury securities, occurs at the _______________, where actual transactions take place
time drafts
orders to pay a specified amount of money to the bearer on a given future date ..when the bank accepts this, they unconditionally promise to pay the holder the face amount of the draft at maturity even if bank finds trouble collecting from customers
sight drafts
orders to pay immediately, like bank checks
Lloyd's associations
organizations that do not directly write insurance but instead provide a marketplace and services to members of an assoc who write insurance as individuals ...la empresa mas famosa es Lloyd's of London, where the members have unlimited liability for the risks they underwrite : aka ellos podrian perder todas las cosas
public markets
organized financial markets where securities registered with the SEC are bought and sold
poiints, dollar fees
origination fees can be expressed as -___________________-%'s of the mortgage's principal amt and as ______________________ like an app fee or doc prep fee
selling group
other investment banking firms, known as the ______________, can be enlisted to assist in the sale of the securities being issued ...these members bear no underwriting responsibility but receive a commission for whatever securities they sell
noncompetitive bids
other investors, including individuals can enter ______________ at each treasury securities auction through the Treasury Direct program
VOlcker rule
parte de Dood frank, but means that banke holding companies are limited to investing no more than 3% of their Tier 1 assets in propietary trading l, private equity or hedge funds
STRIPped mortgage backed securities
pass through all pmts of principal and interest on pools of mortgages to holders of security interests in the pool ...the cash flows received by the holders of the interest only security are based solely on the interest pmts being made on the underlying pool of mortgages
shelf registration
permits a corporation to register a quantity of securities with the SEC and sell them over time rather than all at once
convertible term insruance
permits the the term insurance coverage to be switched to whole life insurance without providing evidence of insurability
private pension plans
plans est by private sector groups such as industrial, commercial, union or service org. as well as plans est. by individuals that are not employment related
qualified plans
plans that satisfy the rules and are therefore granted favorable tax treatment
yield curve
plotting YTM (y) and maturity for EQUIVALENT grade securities at a point in time (x)....the measure is often Treasury securities
over the counter market
primarily a dealer market , because these issues are not usually close substitutes for each other a dealer , a dealer with limited capital can make a successful market in a relatively narrow range of stocks...there are a large number of relatively small OTC dealers that concentrate trading in particular industry groups or geographic areas
over the counter market OTC
primarily a dealer market where securities not sold on one of the organized exchanges are traded
competitive rates
primary dealers who buy in large quantities must bid specific -____________in increments of a half of a basis point
1. bringing new securities to public market and private placements (underwriting business) 2. mergers and acquisitions (financial advisory business)
primary services of an investment bank
1. venture capital private equity 2. buyout private equity
private equity can be broken into 2 primary groups
individual equity
private pension plans and insurance plans stress _____________,paying benefits in direct relation to contributions
moral hazard
problems occur after the loan or transaction takes place when the borrower engages in activities that increase the probability that the borrower will default
adverse selection
problems occur before a financial transaction takes place ..more severe for small business and consumers with lack of publicly available info
annuities
products sold by life insurers that can be thought of as the opposite of life insurance because they are systematically liquidating an accumulated estate and protecting the annuitant against the economic consequences of living too long
shorter
property and insurance liability insurance policies have a _________duration than life insurance policies, usually written for 6 months or a year
perils
property and liability insurers sell policies that offer portection form direct and indirect loss caused by ___________
rollover mortgages/renogotiated mrate mortgages
protect the lender from being locked into a long term low rate of interest : the interest rate is reset to prevailing interest rates at predetermined periods
interest rate
protection against changes in purchasing power can be incorporated into the ________________ o na loan contract
liability insurance
protects against the peril of legal liabilility
venture capitalists
provides source of funds to finance growth, these investors who also provide mgmt expertise to the company, most likely to invest after the enterprise has exhausted capital provided by its founders but before it's merged into a larger firm or makes an initial public offering of its stock
federal funds
provides the means by which commercial banks and a limited number of other financial institutions trade large amounts of liquid funds with one another usually for a day only
bond ratings
published rankings of bonds based on relative default risk
liability insurance
purchased by individuals and businesses to protect against financial loss because of legal responsibility for bodily injry, property damage, and personal injury
property insurance
purchased by individuals and organizations to protect against direct or indirect loss to property they own
reinsurance
reduces objective risk : shifting some of the risk that the they have insured to another insurance company
vesting
refers to an employee's right to employer promised pension benefits or employer contributions
subprime
refers to borrowers whose credit quality is less than stellar and who have a greater risk of default than prime borrowers
default risk
refers to the possibility of not collecting the promised amount of interest or principal at the agreed time
interest rate stability
refers to the swings or volatility of interest rates over time
RUle 144A
removes this restriction and allows large institutions to trade private placements among themselves without having to hold securities for 2 years or register them with the SEC
1 day
repos are usually made for ________ or short terms but there can be longer ones too up to 3 mos .
deferred availability cash items
represent the value of checks deposited at the Fed by depository institutions that have not yet been credited institutions' accounts
negotiated offering
represents a contractual arrangement between te underwriter and the issuer in the public sale of bonds whereby the investment banker obtains the exclusive right to originate, underwrite and distribute the new bond issue
float
represents a net extension of credit from the Fed to depository institutions...it is the difference between deferred avaiability cash items and CIPC
common stock
represents an ownership claim on firm´s assets, the equity holders have the right to the firm´s profits
private equity
represents ownership of a company however cannot be traded on a public stock exchane
final prospectus
reproduced in quantity and distributed to all potential investors...by law investors must have this before they can invest
securities dealers
repurchase agreements are one of the largest sources of funds for securities dealers
total reserves
required reserves + excess reserves = required: reserves that the bank is required to holy by law excess reserves: reserves in excess of those required
Securities Act of 1933
requires full disclosure of relevant info relating to the issue of new securities in the primary market ...requires the registration of new securities and the issuance of a prospectus that details the recent financial history of the company
OTC bulletinboard
requires that companies must file current financial reports with the SEC to be quoted on their OTC system
liquidity risk
risk that a financial institution will be unable to generate sufficient cash inflow to meet required cash outflows
municipal securities
securities issued by state and local governments that sell for lower market yields than comparable securities issued by U.S. treasury or private corporations b/c al coupon income earned on state and local gov't debt is exempt from federal taxes -----AT yield=before tax yield(1-t)
reserves
selling of life insurance products creates liabilities for hte company, which are called ))))))))))))))))))
larger
si la tasa de interes que es pagado por the Fed sea mas grande, los bancos son fomentado para tener una cantidad ____________ en las reservas excesas con el Fed
increases, declines
si the Fed funds rate aumenta, la cuesta oportunidad para tener mas de las reservas en excesas_______________, por eso, la cantidad de reservas que son demandado ______________ (la curva demanda para las reservas de los bancos se dismunye)
employee retirement income security act
signed into law on labor day 1974, does not require employers to establish a pension program for their employees, it does require that certain standards be observed if the plan is to receive favorabl tax treatment
policyholders' surplus
similar to owner's equity: what would remain if the company used its assets to repay all of its liabilities
discount brokers
simply take and execute customer's orders and do not in general offer investment advice ...fee is lower
pure risks
situations in which 2 outcomes are possible: loss nor no loss Ex: risk of poor health, risk of premature death, risk legal liability
social adequacy
social security is a social insurance program that combines elements of private insurance and welfare and benefits stress _______________slanting benefits in favor of certain groups in order to acheive a broader social goal, a min floor of income for everyone
revenue bonds
sold to finance a specific revenue producing project, in the event of default, only the revenue generated from the project backs these bonds ...usually these projects are toll roads and bridges, water and sewage treatment pplants, univ. dormitories, parking fac. etc. ...may be riskier than general obligation bonds
cash management bills
sometimes the Treasury issues bills of dif. maturities called ____________________-...typically issued in large denominations but min amount is $100
marine insurance
special classfication of property and liability insurance which cover losses related to transportation exposures, are divided into 2 categories ocean marine and inland marine
bank run
start bank panics and is when a large number of depositors at the same time want to convert their deposits into cash and many of the deposits are payable on command
investment grade
state and federal laws require commercial banks, insurance companies, pensionfunds and other financial institutions to purchase only securities rated as ___________________
municipal bonds , issuers
state and local government bonds, ________________encompass all issues of state govs and their political subdivisions such as cities, counties, school districts, transit authorities...what is unique is that the number of _____________is so large ...no other direct capital mkt accommodates so many
National Asoc. of INsurance Commissioners
state insurance commissioners are members of the _________to help set uniform regulatory standards amongst states, not a statutory body but an organization of insurance commissioners quien quedan regularamente para discutir las problemas de regulacion y para preparar un modelo de legislacion para recomendar a los legislatures de los estados
price risk
states that bond prices and bond yields are inversely related...increases in interest rates lead to capital losses that cause total returns to decline....decreases in interest rates lead to capital gains that cause total returns to rise -this risk results from fluctuations in total returns caused by capital gains and losses
1. prohibited commercial banks from underwriting or trading, for their own account, stocks, bonds or other securities EXCEPT for gov't securities and CD's 2. limited the debt securities that commercial banks could purchase for their own account to those approved by bank regulatory authorities 3. prohibited indivdiuals and firms engaged in investment banking from simultaneously engaging in commercial banking
statutes of Glass Steagall Act
indexes
stock market _________________ are useful to summarize the vast array of info generated by the continuous buying and selling of stocks
renewable term insurance
this states policies may e palced back in force again at the end of the coverage period the insured does not have to provide evidence that he /she is still insurable ; prevents adverse selection: when those most likely to suffer a loss seek to purchase insurance
expectations theory
this theory assumes that there is a formal relationship between long and short term interest rates
expectations theory
this theory states that the shape of the yield curve is determined by the investors' expectations of future interest rate movements and that changes in these expectations change the shape of the yield curve -it assumes that investors are profit maximizers and that they have no preference between holding a LT security and holding a series of ST securities ....aka they are risk neutral (indifferent to interest rate risk)
flow of funds
this type of data shows the movement of savings, the sources and uses of funds, through the economy in a structured and comprehensive manner
BEY
this yield assumes a 365 day year and uses the price rather the face value of the T bill as the bassis =discount/Price * (365/days to maturity)
participating policies
those that pay dividends to policyowners , los dividendos no son garantizado
Treasury
though the Fed's loan accounts and portfolio of gov't securities earnings go to the _____________, they provide part of the foundation for hte Fed's political independence from the president and Congress
Board of Governors chaairman
though the fed reserve system was designed to diffuse power among regional lines between everybody, today, most authority in the system resides with the _________________ in D.C. -the dominant person in forming FOMC monetary policy directive is the ___________of the Board
banker's acceptance
time draft drawn on and accepted by a acommercial bank
1. terminal value of the bond (selling price), call price (if bond called early) or the par/FV if held till maturity 2. accumulated FV of all the coupon pmts we received based on a known or assumed reinvestment rate
to calculate the total return for a bond, you need
raise
to dampen inflation, a central bank _____________ interest rates to slow rate of econ growth
syndicates
to decrease the price risk of any one primary issue, underwriters form _________ comprising other investment banking firms ...so each underwriter receives a portion of the underwriting fee as well as an allocation of the securities being sold that it can sell to its own customers
claims adjusters
to make sure a covered loss has occurred, insurers use
letter of credit
to obtain financing, the U.S. importer has a U.S. bank write an irrevocable _ for the amount of the sale, sent back to forein exporter, authorizing the foreign exporter to draw a time draft for the sale price on the importer's bank
accredited investors
to qualify for a private placement exemption, the sale of securities must be restricted to a small group of _________________meeting income and wealth requirements ....usually includes insurance companies, pension and mutual funds and venture capitalists
NOT
today, many participants in the fed funds market do NOT hold balances at the federal reserve like federal agencies and securities firms
7, 12
today, the Fed Reserve consists of a ___ member Board of Governors, _________ national regional Fed banks ( and their branches) located throughout the country, member banks, and a series of advisory committees
Treasury dept
today, the ____________ primary responsability to manage the federal government's finances once the president and Congress have agreed on what items will be included in the annual budget
variance, standard deviation
total risk of a security is measured by _________________-, which measures the width of a probability distribution of returns while the variance is this amount squared -the larger this is, the greater the total risk, the more likely you will have a large move either up or down
federal funds market
traditionally, the ________________ is where commercial banks borrow and lend excess reserve balances held at the federal reserve
low
transaction costs in the money market must be ________________, so they are sold in large wholesale denominations
securitization
transferes risk from the originators of the loans, banks , mortgage brokers, etc., to the investors and insurers of the asset backed securities
general obligation bonds
type of muni backed by the "full faith and credit" the power to tax, of the issuing political entity, there are NO assets pledged in even of default ...used to provide basic services to communities like education, fire and police, health care facilities...require voter approval...this is the slowest growing portion of muni debt market
duration matching approach
una manera para eliminar el riesgo del precio y riesgo de "reinvestment": structure tu inversion bono en una manera que the duration of the bond or a bond portfolio = you holding period ....in this way, the capital gains or losses from itnerest rate changes are EXACTLY offset by changes in reinvestment income ...able to lock in a given target return to your investment *note: the duration apporach only works when term structure of interest rates is flat and moves in parallel shifts...which DOES NOT Happen in real world...& this strategy only works for ONE TIME changes in interest rates
fully contributory plan
under this, only the employee makes contributions to the plan
reallocate
unlike market segmentation theory , the preferred habitat theory does not assume that market investors are completely risk averse, but allows investors to _______________-- their portfolios in response to expected yield premiums
federal gov't expenditures
unlike private expenditures, ______________ expenditure are not usually related to economic determinants , they also are not subject to the same budget constraints as other economic units b/c the federal government can print money
Treasury dept
unlike the Fed Reserve, the ___________--has a MAJOR liquidity problem as tax receipts tend to be concentrated around the scheduled tax payments dates but govt expenditures tend to be more evenly distributed throughout the year ....total expenditures exceed total receipts most of the time
contributory plans
use employer and employee contributions
expansion financing
used for growth and expansion
startup financing
used to develop the product and begin marketing
duration
using STRIPs we dont have to rebalance our portfolio because the__________________of a stripped security is the same as its maturity
technology
venture capitalists prefer to invest in ________________ based businesses as development cycle is long and minimum efficient sscale is larger
easy money policy
western and agricultural states preferred this, this is where it was easy for banks to issue banknotes when businesses wanted loans, easy credit, and low interest rates
primary market
when a company issues equity , it occurs in the ___________________, this is the only time a company receives money from selling the share
shelf registration
when a company issues securities to the public but goes through this ___________ process that allows them to copmlete much of the gen registratio nproceudre early so they can quickly define the terms of the sec and complete the registration process for offering their securities to the public when market conditions are most favorable
credit risk
when a financial institution makes a loan or invests in a bond or other debt security the institution bears _______________ because it is accepting the possibility that the borrower will fail to make either interest or principal payments in the amount and at the time promised
squeezing the market
when a single dealer controls a signficiant portion of a particular maturity, the dealer may be able to sell the bills at prices higher than otherwise would be the case in competitive markets
falls, rises, discount
when all other factors constant, when the Fed lowers the discount rate, the fedfunds rate __________ and when the Fed raises the discount rate, the fed funds rate ____________ ....the fed likes to keep the ____________ rate higher
stop order
when an investor wants to sell only if the price drops to the stop price and buy if the price increases to the stop price
market failure
when bankers decide not to make any loans to businesses or consumers in a particular market
reserves
when banks borrow atthe discount window, there is an ______________ in reserves in the banking system , and an increase in the money supply
country
when bonds are issued outside the home country of the issuer, they must conform to the regulations imposed by the __________in which they are issued
unchagned
when checks are cleared and reserve balances are transferred , is important to recognize that the total level of reserves at the Fed is _________________
base index, starting date
when constructing a market index, the 1st decision is to decide what the _____________value is and what the _______________date is , this is completely arbitrary b/c absolute index values are meaningless, only relative changes in index values convey useful info
increasing, decreasing
when flight to quality occurs, U>S treasury sec. become popular thus __________their prices and _________________ their yields
extension risk
when interest rates are high, this is when the expected timing of mortgage repayment extends further into the future
asset backed commercial paper
where institution sells assets to a bankruptcy remote, SPV or structured investment vehicle allowing for the issuing institution to be legally separated from the Special purpose vehicle (SPV)
refinance, call risk or prepayment risk
when interest rates are low, many people refinance their old mortgages by obtaining new mortgages with lower interest and paying off the balance due on the old mortgages: this exposes the mortgage owner to +++++++++++++++++++ because the mortgage isrepaid sooner than expected
flight to quality
when investors buy bonds with high credit ratings, and sell bonds with low credit ratings during a recession...el crecimiento de demanda para bonos de alta calidad, conduce sus precios mas alto y cae su rendimiento
maturity
when issuing debt for capital expenditures, firms often try to match the expected asset life with the ____________ of the debt
bondholders
when revenue bonds default, ___________can take control of the assets pledged and liquidate them...these bond types do not require voter approval ...more popular recently ...esp. during difficult econ times
upward sloping
when short term interest rates are expected to rise in the future, the yield curve is ____________________
raises , decreases
when the Fed __________ the reserve requirement, the fed funds rate increases, and when the Fed _______________ the reserve requirement, the fed fund rate declines
increasing, money supply
when the Fed buys governemnt securities, it pays for them by providing the bank with additional __________________, thus immediately _______________ the monetary base and thus the ______________
NASDAQ
when the HASD introduced an automatic computer based quotation system, this provided continuous bid ask prices for the most actively traded OTC stocks ...an electronic version of pink sheets
reopening
when the Treasury issues additional amounts of an outstanding issue, it is called a ______________- fof the issue
subprime
when the borrower's credit score is below some lender determined threshold, the mortgage is considered ____________
1. reinvest profits in company: RE 2. pay money to shareholders as dividends
when the company has earnings, they have 2 opciones
discount window scrutiny
when the discount rate is low, financial institutions have an inexpensive source of funds for RR obliations provided they don't mind the ______________, that is banks that frequently borrow from the discount window signal that they may have serious fianancial problems b/c they aren't able to obtain funds in the market
leveraged buyout
when the private equity firm borrows money to purchase the shares in a buyout
bank panics
when the public demands more cash and the banking system often ran short of cash back in the day and the economy experienced problems
breaking the buck
when the share price has fallen below $1
downward sloping
when the yield curve is like this, it means that short term rates EXCEED long term ones
leveraged buyout deal, LBO
where a firm is acquired by issuing debt and then taken private
uniform price options , stop out rate
where all bidders pay the same price ...competitive and noncompetitive bids are made and accepted, but once accepted, all bidders ay the same price based on the _____________- rate for the auction (the highest rate accepted)
subordinated junior debt
where bondholder's claims to the company's assets rank behind senior debt
capital markets
where capital goods are financed with stock or long term debt instruments , less marketable
broker, broker dealer funciton
where the bank acts as a _____________buy bringing buyersr and sellers together, or it may involve a dealer function, in which the investment bank carries an inventory of securities from which it executes buy and sell orders and trades for its own account _______________
competitive bidding
where the issuer publicly announces a desire to sell securities and solicits offers from several investment banking firms the alternative is direct negotiation with a single investment banker
asymmetric information
where the need for info about financial transactions occurs, this is when buyers and sellers do not have access to the same info, sellers have more info than buyers usually aka issuers of securities know more than investors
beige book
where the regional bank presidents present their views of eon conditions in their districts ...this is the only Fed briefing book distributed publicly and frequently receives a lot of press coverage
underwriting
where theinvestment banker guarantees that the issuer receives a fixed amount of money whether the securities are all sold to investors or not
dual class firms
where there are 2 classes of stock each having different voting rights, allows managers to raise equity capital while maintaining voting control over the firm
small and medium size companies
who uses junk bonds the most
1. reduce 2. demand
with Fed's exanded power to pay interest on reserves, the trading desk has 2 options when wanting to raise fed funds rate: 1. it can ________ the supply of reserves by selling Treasury securities in the open market 2. it can influence the ________________ for reserves by raising the rate it pays on ecess reserves, encouraging banks to put more reserves on deposit atthe Fed and lend less to other banks
principal
with TIPS, the _____________amount on which the coupon pmt are based changes as the inflation rate changes ....usually tracked against the CPI
fed funds exchange
with _____________ there is no physical transfer of funds t hat occurs
sinking fund provision
with a _______________ the issuer MUST retire a portion of the bond as promised in the indenture vs a _______________that grants the issuer to the right to retire bonds before their maturity
private mortgage insurance
with insurance, the lender can extend more credit and not bear additional risk , the mortgage insurer accepts the additional risk in return for the insurance premium pmt
Federal reserve system
with the 2010 Financial Regulatory Reform Act, the "wnner" among the regulatory agencies with respect to power and influence e was the _________. Now the Fed could monitor and intervene in the business affairs of large complex and noncomplex holding companies that pose substantial risk to the national econom y
syndicates
with the lloyd's of london, the names, members, are grouped into ____________and what type of insurance the _____________-writes and how much premium is charged son determinado por sus underwriters
cash flow underwriting
writing insurance at a discounted price in order to get the premium dollars to invest at high interest rates
multiple line policies
written by property and liability insurers, combine property and liabiilty insurance coverage in a single contract the homeowner's form provides these 6 things 1. damage to dwelling 2. damage to other structures 3. damage to personal property 4. loss of use 5. personal liability 6. medical pmt to others line
straight term insurance
written for a certain time period and then terminates
financial claims
written promise to pay a specific sum of money the principal, plus interest for the privilege of borrowing money over a period of time ...are issued by DSUs (liabilities) and purchased by SSUs as assets
Samurai bonds
yen denominated bonds issued by foreign companies in japan...interest rates are lower
interest rate risk
zero coupon bonds are much easier to use than whole bonds to immunize portfolios against ____________
