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21 Cards in this Set
- Front
- Back
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What are real assets?
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land, buildings, machines, knowledge; generate net income to the economy
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What are financial assets?
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stocks and bonds; define the allocation of income or wealth among investors
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What are the 3 broad types of financial assets?
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1. fixed income
2. equity 3. derivatives |
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What are fixed-income securities?
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fixed stream of income/or determined by a specific formula; corporate bond
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What is common stock or equity?
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ownership share in a corporation; no promised payment; dividends plus a prorated ownership in the real assets of the firm
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What are derivative securities?
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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
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What are agency problems?
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managers, who are hired as agents of the shareholder, pursue their own interests instead; avoid risky projects to protect jobs; overconsumer luxury items, etc...
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How is the agency problem mitigated?
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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 |
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What is asset allocation?
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choice among broad asset classes; stocks, bonds, commodities, real estate
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What is security selection?
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what type of security to hold within each asset class
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What is passive management?
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hold highly diversified portfolios without spending effort or other resources attempting to improve investment performance through security analysis
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What is active management?
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attempt to identify mispriced securities or time the performance of broad asset classes
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What do financial intermediaries do?
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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
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What do investment banks do?
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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
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What are American Depository Receipts (ADRs)?
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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
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What are World Equity Benchmark Shares (WEBS)?
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similar depository structure to ADRs, but allows investors to trade portfolios of foreign stocks in a selected country; trade on American Stock Exchange
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What are pass-through securities?
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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
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What are Brady bonds?
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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
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What are protected equity-linked notes?
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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
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What is unbundling?
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breaking up and allocating the cash flows from one security to create several securities
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What is bundling?
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combining more than one security into a composite security
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