Use LEFT and RIGHT arrow keys to navigate between flashcards;
Use UP and DOWN arrow keys to flip the card;
H to show hint;
A reads text to speech;
72 Cards in this Set
- Front
- Back
What is debt?
|
What must be paid back (bond markets)
|
|
What is equity?
|
Ownership in an asset
|
|
What is a residual claimant?
|
the corporation must pay all its debt holders before it pays its equity holders
|
|
What is the primary market?
|
Corporation sells stocks
|
|
What is the secondary market?
|
Stocks sold among investors
|
|
What is an investment banker?
|
Deals with initial public offer
|
|
What are two reasons for taking a company public?
|
1. Finance to exand the company
2. Take the money and run |
|
What is underwriting?
|
It guarantees the stock to sell, guarantees by paying if it doesn't sell
|
|
Why is the secondary market important?
|
It indicates the firm's health and overall economic health.
|
|
What is an exchange?
|
Where buyers and sellers come together and agree on a price
|
|
What is an over-the-counter market?
|
An inventory of stocks
|
|
What do brokers do?
|
They match buyers to sellers
|
|
What do dealers do?
|
They keep an inventory of stocks
|
|
What are three functions of financial intermediaries?
|
1. Reduce transaction costs
2. Reduce asymetric information 3. Risk sharing |
|
What is a financial intermediary?
|
It brings together buyers and savers
|
|
What are transaction costs?
|
The time spent carrying out financial transactions
|
|
What is asymetric information?
|
Where one party has more information than another party
|
|
What is adverse selection?
|
A problem caused by asymetric information BEFORE the transaction occurs
|
|
What is moral hazard?
|
A problem caused by asymetric information AFTER the transaction occurs
|
|
What are three types of financial intermediaries?
|
1. Depository institutions
2. Contractual savings institution 3. Investment intermediaries |
|
What are types of depository institutions?
|
Commercial banks
Savins and laon associations and mutual savings Banks Credit unions |
|
What is a coincidence of wants?
|
Finding someone to trade for what you have
|
|
What does indivisibility refer to?
|
Something cannot be split into smaller sections
|
|
What is indirect exchange?
|
Selling a product not for a good you need, but to turn around and sell
|
|
What are the four characteristics of money?
|
1. Evenly divisible
2. Durable 3. Transportable 4. Scarce |
|
What are the three functions of money?
|
1. Medium of exchange
2. Unit of account 3. Measure of values, store of value |
|
What causes inflation?
|
The government printing too much money
|
|
What is fractional reserve banking?
|
Increasing money supply through loans
|
|
What are interest rates?
|
The opportunity cost of borrowing money
|
|
What is an opportunity cost?
|
Implicit plus explicit costs
|
|
How would you value a service firm?
|
The value of a business is the present value of the stream of net profit from now to infinity
|
|
What is a corporate rater?
|
They buy bad companies and liquidate their assets
|
|
What is the best measure of interest?
|
Yield to maturity
|
|
A _____ hasa face value and maturity date. It was bought below the face value and repaid at maturity.
|
Discount bond
|
|
A _____ has a face value, a matuirty date, and a coupon rate.
|
Coupon Bond
|
|
What is a perpetuity?
|
A bond that never matures. It pays intrest for ever. Also known as a Consol
|
|
What is a current yield?
|
An approximation on a coupon bond.
|
|
_____ give a better answer the closer the price is to the face value.
|
Current yield
|
|
_____ is more accurate the longer the time to maturity.
|
Current yield
|
|
Price is _____ related to the interest rate.
|
Inversly
|
|
What are the four parts of demand?
|
1. Wealth
2. Expected return 3. Risk 4. Liquidity |
|
Borrowers _____. Lenders _____.
|
Supply; Demand
|
|
What is wealth?
|
The summation of all assets
|
|
An increase in wealth creates an increase in _____ and a decrease in _____.
|
Demand and Price; Interest
|
|
What is expected return?
|
Return expected over the next period
|
|
What is risk?
|
The degree of uncertainty associated with the return.
|
|
The more risky something is, demand _____.
|
Falls
|
|
The less risky something is, demand _____.
|
Rises
|
|
What is liquidity?
|
The ability to turn assets into cash
|
|
Which bonds are the most liquid?
|
Treasury bonds
|
|
The more liquid a bond is, the _____ its demand.
|
Higher
|
|
How does an increase in supply effect intrest rates?
|
An increase in supply drives down the price and increases the quantity, and causes the intrest rates to rise.
|
|
What does Centeris Parabus refer to?
|
All other things held equal
|
|
Why do borrowers love inflation?
|
The money they borrow is greater than what they pay back.
|
|
What is the Fisher Effect?
|
Interest rates will increase to compensate for inflation
|
|
What did Cain say?
|
"You can spend your way through prosperity."
|
|
Anything below BB is considered what?
|
A junk bond
|
|
Why are US Treasury Bonds risk-free?
|
The government has never defaulted on its loan.
|
|
What is the liquidity premium?
|
The difference between corpate and treasury prices
|
|
An inverted yield curve is due to what?
|
High interest rates
|
|
Historically, when a yield curve is inverted, what typically follows?
|
A recession about a year later
|
|
What are the three parts to bond yields?
|
1. Bonds of different maturities move together over time
2. When short-term interest rates are high, yield curves are more likely to have an upward slope, and visa versa 3. Yield curves almost always slope upwards |
|
What is the expecations theory?
|
Bonds of different maturities are perfect substitutes (expected return must be equal. Long-term bonds are an average of the yield of short-term bonds.
|
|
What is the segmented markets theory?
|
Bonds of different maturities are not substitutes at all.
|
|
What is the liquidity theory?
|
Bonds are substitutes, but they are not perfect substitutes. Long-term bonds are an average of short-term bonds plus a liquidity premium (1).
|
|
How do you determine the stock price of the market?
|
The Gordon Growth Model
Dividend/(K - G) |
|
If the interest rates on all bonds rise from 5 to 6 percent over the course of the year, what kind of bond would you want?
|
A bond with one year to maturity
|
|
To claim that a lottery winner who is to receive $1 million per year for twenty years has won $20 million ignores the concept of what?
|
Discounting the future
|
|
The concpet of _____ is based on the common-sense notion that a dollar paid to you in the future is less valuable to you than a dollar paid today.
|
Present value
|
|
For a consol, the current yield is a _____ of the yield to maturity.
|
Exact measure
|
|
The interest rate that economists consider to be the most accurate measure is what?
|
Yield to maturity
|
|
The current yield is a less accurate measure of the yield to maturity the _____ the time to matuirty of the bond and the _____ the price is form/to the par value.
|
Shorter; farther
|