Study your flashcards anywhere!

Download the official Cram app for free >

  • Shuffle
    Toggle On
    Toggle Off
  • Alphabetize
    Toggle On
    Toggle Off
  • Front First
    Toggle On
    Toggle Off
  • Both Sides
    Toggle On
    Toggle Off
  • Read
    Toggle On
    Toggle Off

How to study your flashcards.

Right/Left arrow keys: Navigate between flashcards.right arrow keyleft arrow key

Up/Down arrow keys: Flip the card between the front and back.down keyup key

H key: Show hint (3rd side).h key

A key: Read text to speech.a key


Play button


Play button




Click to flip

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
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.
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 _____.
The less risky something is, demand _____.
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.
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