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FINA 4310 Terms1

Terms for test 1

QuestionAnswer
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
Created by: 1119570138