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42 Cards in this Set

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  • Back
What are two qualities of a competitive market?
lowest costs + efficient
What is a market failure?
something mechanisms of competition and pricing could not handle
What do regulations do?
1. prevent issuers of securities from defrauding investors by withholding information
2. competition/fairness
3. stability
4. restrict foreign influences
5. control level of economic activity
What are disclosure regulations?
companies must make everything public
What is asymmetric information?
when managers/investor have unequal access to information; aka insider trading
What is the agency problem?
managers in it for themselves
What are the Securities Act of 1933 and the Securities Exchange Act of 1934?
SA 33- disclosure regulations; issuer cannot be deceitful
SE 34- deals with periodic disclosure of company information
SEC empowers both acts
What is the National Association of Securities Dealers (NASD)?
SRO- self regulatory organization- regulates conduct in issuing securieties and selling them to the public
What two organizations regulate the options and futures market?
CFTC- Commodity Futures Trading Commission- licences and monitors futures exchanges; authorizes firms
SEC- oversees options market when underlying asset is equity
What is the NFA?
National Futures Association- SRO that assists CFTC
What does the FED do?
responsible for nation's money and banking system; sets minimum requirements for amount of equity (shareholder contributions) that banks must have relative to their assets
What is the OTS?
Office of Thrift Supervision- monitors loans
What does the International Bank Act of 1978 stipulate?
foreign banks must select a home state and abide by geographical regulations
Key Points about Japanese Regulation
regulator: Ministry of Finance
exchange: Tokyo Stock Exchange
unlike US: direct funding in bond markets only goes to large firms; debt securities can be issued whenever; banks can invest substantial sums in publicly traded firms (cannot do in US); foreign stocks are listed on TSE
notes
commercial banks can do investment banking/issue securities through a subsidiary
Key Points about German Regulation
regulator: Bundesbank (central bank)
once claimed to weak on disclosure regulation; bond market is weak because cumbersome Bundesbank must approve issuances; insider trading law in 1994; regulations less stringent than US; universal banks take part in all types of financial activity; 8 stock exchanges; European Central Bank controls money supply; 1/3 of shares on main stock market are foreign
Key Points about England Regulation
regulator: Department of Trade and Industry
Securities and Investment Board = SEC
Bank of England = Fed
stock exchange = London International Stock Exchange; numerous foreign companies listed on LISE
notes: banks can own subsidiaries that are listed on the stock exchange
What are the reasons for regulation reform?
1. avoid crises: 1987 stock crash; interest rate ceiling and well-being of US banks and S&Ls
2. financial innovation regulation- like inception of derivatives (1980s)
3. globalization- don't want too strong regulations to force institutions away
What are the 11 properties of financial assets?
1. moneyness
2. divisibility and denomination
3. reversibility
4. cash flow
5. term to maturity
6. convertibility
7. currency
8. liquidity
9. return predictability
10. complexity
11. tax status
What is moneyness?
how easily can the asset be transformed into money- costs, delay, risk?; near money- time and savings deposits, Treasury bill
What are divisibility and denomination?
minimum size in which a financial asset can be liquidated and exchanged for money; many bonds come in $1,000 denominations, commercial paper $25,000 units, certificates of deposit in $100,000; divisibility is desirable for inverstors but not for borrowers
What is reversibility or turnaround cost?
cost of investing in a financial asset and then getting out of it and back into cash again; determinants- bid-ask spread, commissions
What does thickness of the market mean?
thick market- many transactions
thin market- not many transactions
thicker market makes assets more reversible
What is cash flow?
the return that an investor will realize by holding a financial asset: dividends, coupon payments on bonds, stock price gains
What is term to maturity?
length of period until instrument makes its final payment or owner is entitled to demand liquidation
What are demand instruments?
checking accounts- creditor can ask for repayment whenever
What is a perpetual or consul?
promises to pay a fixed amount per year indefinitely and not to repay the principal
What are call provisions?
debtor can repay in advance
What is a put option?
investor can ask for early repayment
What is convertibilty?
ability to convert assets in one class or among classes
What is a convertible bond?
a bond that the holder can change into equity shares
What is currency?
must take into consideration currency ratios
What is liquidity?
how much sellers stand to lose if they wish to sell immediately as against engaging in a costly and time-consuming search
illiquid assets: stock of small company, bond issued by small school district- thin market
What are some determinants of liquidity?
1. is the market thick or thin?
2. contractual agreements
3. quantity of asset to be sold
What is return predictability?
how much return volatility is there?; how risky are the cash flows?
What is complexity?
some assets are combinations of two or more simpler assets; must break them down to find value
complex assets: convertible bond, bond that has payments that can be made in different currency
What is a callable bond?
issuer who can repay debt prior to maturity
What is a putable bond?
bond that can be sold back to the issuer at a fixed price
What is tax status?
different assets are taxed differently; different geographical places have different taxes; different years have different taxes
What is present value?
correct price of an asset equals present value of all cash flows that the owner of the asset expects to recieve during its life
What is the discount rate?
return that the market requires on an asset; sum of real rate of interest; inflation premium; default risk premium; maturity premium; liquidity premium; exchange-rate risk premium
What is duration?
the approximate percentage change in price for a 100 basis point change in interest rates around the prevailing yield; the larger the yield change, the poorer the approximation that duration provides
What is the difference between modified duration and effective duration?
effective duration takes into account the cash flow changes that occur when the interest rate changes