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FINA 4310 Terms1
Terms for test 1
| Question | Answer |
|---|---|
| Law of One Price | If equivalent investment opportunities trade simultaneously in different markets, they must trade for the same price in both |
| Value Additivity | Price of asset that consists of other assets must equal the sum of the prices of the other assets |
| Securities Markets | Made up of Debt Markets (which include money markets and bond markets), Equity Markets, and Derivatives Markets |
| Money Markets | Short term (<3 yrs), very liquid. |
| Capital Markets | Broken down into bond and equity markets. Raise money for investment projects through these |
| Liquidity | Ability to buy or sell an asset quickly, at a known price |
| Bank Discount Method | Quoting bids and offers for T-bills in terms of yield; based on 360 day year |
| Certificates of Deposit (CDs) | Time deposit with a bank; penalty for early withdraw. Insured by FDIC up to $250,000. Short term CDs are highly marketable |
| Commercial Paper (CP) | Short term debt issued by large corporations (low credit ratio) Maturities up to 270 days - then firm must register with SEC Highly liquid, often rolled over |
| Bankers Acceptances | Like a postdated check. Used often in international trade |
| Repurchase Agreements (Repos) | Very short term loan acquired by gov. securities dealers (overnight) Dealer sells to investor and agrees to repurchase at higher price |
| Reverse Repo | Opposite transaction of repo where government dealer lends money Buys securities from investor than sells back |
| Eurodollars | Deposits of US dollars at foreign branches of US banks |
| Federal funds | Bank's reserve requirement funds on deposit with the Fed. Reserve |
| London Interbank Offer Rate (LIBOR) | Lending rate between large banks in London Benchmark interest rate for many other transactions |
| Government Bonds | Used to finance federal government debt Large, liquid market US treasury notes: maturities between one and ten years US Treasury Bonds: Maturities >10 years TIPS: Treasury Inflation-Protected Securities (get real return) |
| Agency Bonds | Finance activities for public purposes. Government Sponsored Enterprises: Fed chartered, but privately owned (Fannie Mae and Freddie Mac) |
| Dow Jones Industrial Average | Best known, oldest, most popular. 30 large industrial stocks (blue chips) Price-weighted average Disadvantages: Gives higher priced shares more weight, sample is not representative |
| S&P 500 | Value-weighted average. Float adjusted - # of shares outstanding is reduced to exclude closely held shares from the index calculation because such shares aren't valuable to investors. Advantages: Broad sample, automatic adjustment for stock splits |
| Derivative | Financial contract whose value derives from a traditional security (stock or bond), as asset (commodity), or a market index |
| Options | Gives the buyer the right, but not obligation, to buy or sell an asset at a set price on or before a given date Call: Right to buy Put: Right to sell |
| Futures Contract | Obligation to buy or sell a commodity in designated future month at price agreed upon at initiation of contract by buyer and seller Standardized according to quality, quantity, and delivery time, and location for each commodity |
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