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19 Cards in this Set

  • Front
  • Back
Any possession that has value in an exchange. Tangible or Intangible.
Tangible Asset
Asset whose value depends on physical property- land, buildings, machinery
Intangible Asset
Legal claim to some future benefit (Financial Assets)
Financial Asset
Intangible Asset with claim to future cash. Financial Instrument or Security. Sold by Issuer to Investor.
Debt Instrument
Holds claim to fixed dollar amount. Car loan, U.S. Treasury Bond, GMC bond, city bond, etc.
Equity instrument
(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
Preferred stock
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)
Convertible Bond
Allows investor to convert debt into equity under certain circumstances. Combination instrument #2 (both debt & equity)
Fixed-income instruments
Instruments which pay holders fixed dollar amounts, i.e. debt instruments and preferred stock.
* The price of any financial asset is equal to
... the present value of its expected cash flow *
Purchasing Power Risk
(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
Credit Risk
Risk that the issuer or borrower will default on the obligation (Default Risk)
Foreign exchange Risk
Risk that the exchange rate will change adversely
Two economic functions of financial assets
1) Transfer of Funds
2) Shifting of Risk
Spot or Cash Market
Market in which a financial asset trades for immediate delivery
Three functions of Financial Markets
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
Two costs of transacting
Search Costs and Information Costs
Search Costs
cost of advertising intention to sell, time spent locating a counterparty
Information Costs
Costs of assessing the investment merits of a financial asset- the amount and likelihood of the expected cash flow.