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19 Cards in this Set
- Front
- Back
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Asset
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Any possession that has value in an exchange. Tangible or Intangible.
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Tangible Asset
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Asset whose value depends on physical property- land, buildings, machinery
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Intangible Asset
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Legal claim to some future benefit (Financial Assets)
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Financial Asset
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Intangible Asset with claim to future cash. Financial Instrument or Security. Sold by Issuer to Investor.
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Debt Instrument
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Holds claim to fixed dollar amount. Car loan, U.S. Treasury Bond, GMC bond, city bond, etc.
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Equity instrument
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(Residual Claim) Obligates the issuer of the financial asset to pay the holder an amount based on earnings (varying or residual amount), after holders of DEBT instruments have been paid
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Preferred stock
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Equity instrument that entitles the investor to receive a fixed dollar amount, contingent and due only after payments to debt instrument holders are made. Combination instrument #1 (both debt & equity)
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Convertible Bond
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Allows investor to convert debt into equity under certain circumstances. Combination instrument #2 (both debt & equity)
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Fixed-income instruments
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Instruments which pay holders fixed dollar amounts, i.e. debt instruments and preferred stock.
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* The price of any financial asset is equal to
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... the present value of its expected cash flow *
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Purchasing Power Risk
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(Inflation Risk) - risk attached to the potential purchasing power of the expected cash flow (risk of inflation). I.e., risk of a U.S. Treasury security
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Credit Risk
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Risk that the issuer or borrower will default on the obligation (Default Risk)
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Foreign exchange Risk
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Risk that the exchange rate will change adversely
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Two economic functions of financial assets
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1) Transfer of Funds
2) Shifting of Risk |
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Spot or Cash Market
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Market in which a financial asset trades for immediate delivery
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Three functions of Financial Markets
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1) Buyers and sellers in market determine price of the traded asset
2) Provide a mechanism for investors to sell financial assets (offer liquidity) 3) Reduce cost of transaction |
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Two costs of transacting
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Search Costs and Information Costs
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Search Costs
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cost of advertising intention to sell, time spent locating a counterparty
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Information Costs
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Costs of assessing the investment merits of a financial asset- the amount and likelihood of the expected cash flow.
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