Fabozzi Chapter 1

Front 1

product market

Back 1

market for products (manufactured goods and services)

Front 2

factor market

Back 2

market for factors of production (labor and capital)

Front 3

financial market

Back 3

things that are traded; bought and sold

Front 4

asset

Back 4

any possession that has value in an exchange

Front 5

tangible asset

Back 5

value depends on physical properties; (buildings, land, machinery)

Front 6

intangible asset

Back 6

represent legal claims to some future benefit

Front 7

financial asset

Back 7

intangible asset; benefit is future cash

Front 8

debt instrument

Back 8

claim that the holder of a financial asset has is in fixed amounts; car loans, government/company bonds

Front 9

equity instrument (residual claim)

Back 9

issuer of financial asset must pay holder amount based on earnings, after holders debt instruments have been paid; common stock, partnership share

Front 10

“combination instrument”/fixed-income instruments

Back 10

preferred stock; equity instrument that entitles investor to receive a fixed dollar amount, after payments to debt instrument holders are made; or convertible bond; allows investor to convert debt into equity under certain circumstances

Front 11

cash flow risks/uncertainties

Back 11

purchasing power risk/inflation risk; credit risk/default risk; foreign-exchange risk

Front 12

principle functions of financial assets

Back 12

transfer surplus funds to invest to those who need to buy tangible assets; redistribute unavoidable risk associated with cash flow generated by tangible assets among the issuer + the investor

Front 13

spot/cash market?

Back 13

financial asset trades for immediate delivery

Front 14

financial markets provide what three economic functions?

Back 14

1. price delivery process (interaction of buyers/sellers)
2. liquidity (provides a market for an investor to sell a financial asset)
3. reduces cost of transacting (search costs; information costs)

Front 15

search costs?

Back 15

1. explicit costs (money spent to advertise one's intention to sell or purchase a financial asset)
2. implicit costs (time lost in locating a counterparty)

Front 16

information costs?

Back 16

costs associated with assessing the investment merits of a financial asset, amount and likelihood of the cash flow expected to be generated; price reflects this aggregate information in an efficient market

Front 17

money market is for what?

Back 17

short-term debt instruments

Front 18

a capital market is for what?

Back 18

longer-maturity financial assets

Front 19

what is a primary market?

Back 19

deals with financial claims that are newly issued

Front 20

what is a secondary market?

Back 20

exchange of financial claims previously issued

Front 21

what are non-financial enterprises?

Back 21

manufacture products (cars, steel) or provide nonfinancial services (transportation, utilities)

Front 22

what 3 factors have led to the integration of financial markets?

Back 22

1. deregulation or liberalization of markets; activities of market participants
2. technological advances for monitoring world markets, executing orders, analyzing financial opportunities
3. increased institutionalization of financial markets

Front 23

what is a retail investor?

Back 23

individuals

Front 24

what is an internal market/national market composed of (2 parts):

Back 24

domestic market (issued in home country, traded in home country) and the foreign market (issued in foreign country, traded in home country; security must comply with regulations of country where it is issued)

Front 25

what are the two distinguishing characteristics of the external market/international market/offshore market/Euromarket?

Back 25

1. at issuance securities are offered simultaneously to investors in a number of countries
2. securities are issued outside the jurisdiction of any single country

Front 26

what motivates fund-seekers to use the foreign market/Euromarket (3)?

Back 26

1. need substantial funding that they cannot find in the domestic market
2. find lower costs of funding
3. diversify source of funding so as to reduce reliance on domestic investors

Front 27

define a derivative

Back 27

contract that holder has obligation or choice to buy or sell at a future time

Front 28

how does a derivative derive its value?

Back 28

derives value from value of underlying financial asset, financial index, or interest rate

Front 29

define futures/forward contracts

Back 29

2 parties agree to transact a financial asset at a predetermined price at a specific future date; neither party charges a fee

Front 30

define options contracts

Back 30

owner of contract has right, but not obligation, to buy/sell a financial asset at a specified price from/to another party

Front 31

what is an option price?

Back 31

fee a buyer must pay to a seller

Front 32

what is call option?

Back 32

owner has option to buy a financial asset

Front 33

what is a put option?

Back 33

owner has option to sell financial asset

Front 34

what are the advantages of a derivatives market (3)?

Back 34

1. may cost less to execute transaction to adjust for risk than it would in a cash market
2. transactions happen faster
3. can absorb greater dollar transactions without adverse effects on derivative price; derivative market more liquid

Front 35

what other general factors make derivatives useful (2)?

Back 35

1. help adjust for risk
2. make financial markets more integrated