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21 Cards in this Set

  • Front
  • Back
What are real assets?
land, buildings, machines, knowledge; generate net income to the economy
What are financial assets?
stocks and bonds; define the allocation of income or wealth among investors
What are the 3 broad types of financial assets?
1. fixed income
2. equity
3. derivatives
What are fixed-income securities?
fixed stream of income/or determined by a specific formula; corporate bond
What is common stock or equity?
ownership share in a corporation; no promised payment; dividends plus a prorated ownership in the real assets of the firm
What are derivative securities?
options and futures contracts; provide payoffs that are determined by the prices of other assets such as bond or stock prices; used to hedge risk
What are agency problems?
managers, who are hired as agents of the shareholder, pursue their own interests instead; avoid risky projects to protect jobs; overconsumer luxury items, etc...
How is the agency problem mitigated?
1. management pay tied to the success of the firm; options
2. board of directors force out underperforming management
3. security analysts and large institutional investors monitor management
4. takeover; proxy contests
What is asset allocation?
choice among broad asset classes; stocks, bonds, commodities, real estate
What is security selection?
what type of security to hold within each asset class
What is passive management?
hold highly diversified portfolios without spending effort or other resources attempting to improve investment performance through security analysis
What is active management?
attempt to identify mispriced securities or time the performance of broad asset classes
What do financial intermediaries do?
bring lenders and borrowers together; include banks, investment companies, insurance companies, credit unions; intermediaries issue their own securities to purchase the securities of other corporations
What do investment banks do?
advise issuing corporations on the prices it can charge for the securities issued and appropriate interest rates; also markets to the primary market (where issues are offered); trading occurs in the secondary market
What are American Depository Receipts (ADRs)?
domestically traded securities that represent claims to shares of foreign stocks; broker purchases an inventory of stock from a foreign issuer; then sells claims to these issue; denominated in dollars and can be traded on US stock exchanges; ADRs have exchange rate risk
What are World Equity Benchmark Shares (WEBS)?
similar depository structure to ADRs, but allows investors to trade portfolios of foreign stocks in a selected country; trade on American Stock Exchange
What are pass-through securities?
introduced by Ginnie Mae (Government National Mortgage Association); securities that aggregate individual home mortgages into relatively homogeneous pools; investors receive prorated shares of all principal and itnerest payments made on the underlying pool
What are Brady bonds?
risky bonds issued mostly by Latin American countries; US banks exchanged loans to developing nations for bonds backed by these loans; payments on loans are directed to holders of the bond instead of to the bank; makes bank less suspectible to risk; banks remove risk by selling the bonds
What are protected equity-linked notes?
securities issued by financial intermediaries that guarantee a minimum fixed return plus an additional amount that depends on the performace on some specified stock index
What is unbundling?
breaking up and allocating the cash flows from one security to create several securities
What is bundling?
combining more than one security into a composite security