Finance 4130 Test 1

Front 1

· Normal distribution

Back 1

a symmetrical distribution around the mean that predicts the probability of a given value given its mean and standard deviation

Front 2

· Cash

Back 2

refers to cash in hand in bank account, as well as cash equivalents, which are money market instruments

Front 3

· Dividend yield-

Back 3

the return on stocks provided by the dividend

Front 4

· 401(k

Back 4

retirement savings plan of tax free savings (sometimes employer will match savings up to a certain level

Front 5

· 403(b)-

Back 5

non-profit

Front 6

· 457(b)-

Back 6

government

Front 7

· 529 College savings plans

Back 7

tax free savings for college education

Front 8

· Dead cat bounce

Back 8

an increase in returns in the stock market the day after a fall

Front 9

· Load

Back 9

a upfront fee to just be able to invest with a company

Front 10

· Money Markets

Back 10

short term debt instruments with less than one year to maturity, high liquidity, considered cash equivalent

Front 11

1. T-Bills

Back 11

most liquid money market investment, short term govt debt, used as the risk free rate

Front 12

2. Certificate of Deposit

Back 12

time deposit with bank

Front 13

3. Commercial Paper

Back 13

short term unsecured debt notes issued by large companies directly to the public

Front 14

4. Bankers Acceptance

Back 14

an order to a bank by a customer to pay a sum of money at a future date banks agreement to back your debt, often used in overseas markets, banks charges a fee to back your loan and if you default the bank pays the loans

Front 15

5. Eurodollars-

Back 15

U.S. dollars used overseas

Front 16

6. Repurchase Agreements

Back 16

lending out all of your short term assets for a day, for banks to handle reserve requirements p. 31

Front 17

7. Reverse RP

Back 17

- to buy short term assets promising to resell them later

Front 18

8. Federal Funds

Back 18

borrowing from FED by banks to keep reserves in line

Front 19

· Bonds

Back 19

more than one year, in forms of government corporate, and municipal bonds, corporate are the riskiest and munis have tax breaks

Front 20

· Common Stock

Back 20

equity owners of firm, limited liability, residual claim

Front 21

· Preferred Stock

Back 21

get paid dividends first, tax treatment, fixed dividends

Front 22

· Derivative Securities-

Back 22

trading of futures and options; ICE- international currency exchange

Front 23

LIBOR-

Back 23

London Interbank offer rate, the rate that large banks in London charge each other for short term loans, premier short term interest rate measure in London

Front 24

Yield Curve

Back 24

plot of percentage yields vs. the time to maturity

Front 25

· Upward sloping

Back 25

- normal yield curve with long term bonds getting higher yields

Front 26

· Downward sloping (inverted

Back 26

happens when short term bonds are receiving lower returns than long term bonds; this is rare because long term bonds are more risky because money is locked in that rate for a longer period of time. Inverted means that there is a threat of a recession and the FED cuts short term interest rates lowering short term yields making long term attractive.

Front 27

Mortgage-Backed Bonds

Back 27

an ownership claim in a pool of mortgages or an obligation that is secured by such a pool

Front 28

Stock Indexes

Back 28

track average stock returns

Front 29

· Dow Jones Industrial Average

Back 29

tracks 30 large cap stocks

Front 30

· Standard & Poor’s 500 Composite

Back 30

Standard and Poor’s choice of 500 large stocks

Front 31

· NASDAQ Composite

Back 31

100 large stocks

Front 32

· Russell 2000

Back 32

tracks small cap stocks

Front 33

· NYSE Composite

Back 33

tracks NYSE

Front 34

· Wilshire 5000

Back 34

tracks almost all stocks

Front 35

· Nikkei 225

Back 35

tracks Japanese stocks

Front 36

· Nikkei 300-

Back 36

tracks Japanese stocks

Front 37

· FTSE

Back 37

Financial Times of London

Front 38

· DAX

Back 38

Germany

Front 39

· EAFE

Back 39

regional index of everything outside of the United States

Front 40

· MSCI

Back 40

Morgan Stanley Capital Index

Front 41

· Market cap-

Back 41

price of shares x # of shares outstanding

Front 42

· Market-value weighted

Back 42

- weighted by your cap (S&P 500, NASDAQ

Front 43

· Price weighted-

Back 43

DJIA used to measured by adding up the price of the 30 stocks, now more complex

Front 44

· Equally Weighted-

Back 44

(Value Line Index)

Front 45

call option

Back 45

the right to buy an asset a t a specified price on or before a specified expiration date

Front 46

put option

Back 46

the right to sell an asset a t a specified price on or before a specified expiration date

Front 47

Futures

Back 47

obliges traders to purchase or sell an asset at an agreed upon price at a future date

Front 48

Swaps

Back 48

exchange of cash flows

Front 49

· Private equity

Back 49

investor buys a public firm and takes it private, private investor can freeze out once they receive a majority of the stock

Front 50

· Tombstone

Back 50

advertising notice of an IPO

Front 51

· Organized Exchanges

Back 51

Auction markets, Specialist markets, specialist either match buy and sell orders or sometimes they will buy and hold it themselves (NYSE, Chicago, Boston AMEX, etc)

Front 52

· OTC market

Back 52

Dealers market, where a dealer will buy your stock and sell it for a small profit

Front 53

· ECNs-

Back 53

electronic markets, investors trading directly with other traders (ARCA now NYSE, ISLAND now NASDAQ, Instinet, REDIBook)

Front 54

· Seven U.S. Exchanges

Back 54

1. NYSE
2. Chicago (also CBOE, which is a option exchange market)
3. AMEX- American Stock Exchange
4. Boston
5. Philadelphia
6. Pacific (San Francisco)
7. Cincinnati

Front 55

· BID-

Back 55

highest price can buy

Front 56

· ASK

Back 56

lowest price can sell

Front 57

· Order book

Back 57

- list of all the ask and bid prices

Front 58

· OTC Bulletin Board-

Back 58

small amount of trades, no guarantee that stocks can be sold

Front 59

· Pink Sheets

Back 59

small and bankrupt stocks

Front 60

· Upstairs Market

Back 60

a telephone market of investment bankers, large amounts of shares are traded, markets can be for bonds and securities

Front 61

· Commissions-

Back 61

fee paid to broker for making the transaction

Front 62

· Spread-

Back 62

cost of trading with a dealer the difference between the ASK and BID

Front 63

· Market Order

Back 63

take the best price on the market guaranteed execution, but no guaranteed price

Front 64

· Limit Order-

Back 64

guaranteed price but no guaranteed execution

Front 65

· Stop loss

Back 65

sell my stocks if the stock falls below x, guaranteed to be executed but not at a certain price because it becomes a market order

Front 66

· Margin Trading

Back 66

buying stocks on a loan from the broker

Front 67

· Maximum Margin-

Back 67

currently 50%, you can borrow up to 50% of the stock value, set by the FED

Front 68

· Maintenance Margin-

Back 68

minimum amount equity in trading can be before additional funds must be put into the account

Front 69

· Margin Call-

Back 69

notification from your broker that you must put additional funds in your account, trading on the margin is dangerous because if stock goes down you can fall below maintenance margin and receive a call and then you may be forced to sell your stock.

Front 70

· Margin

Back 70

= EQUITY / STOCK VALUE

Front 71

· Short Sale

Back 71

borrow stock and sell it and then buy it back at a lower price, to profit from a decline in the price of a stock. Closing out the position is buying the stock and returning it to the party it was borrowed from

Front 72

· ETFs

Back 72

Exchange Traded Fund funds that follow an index or industry, can be shorted mutual funds cannot, trades all day while mutual funds are traded once a day, tax advantage, has low expenses

Front 73

1. DIAMONDS-

Back 73

tracks DJIA

Front 74

2. SPDR

Back 74

tracks S&P, Standard and Poor’s Depository Receipt

Front 75

3. QQQQ

Back 75

tracks NASDAQ

Front 76

· Mutual Fund-

Back 76

portfolio managed by a professional

Front 77

· REITS-

Back 77

Real Estate Investment Trust, invest in real estate or loans secured by real estate pay high dividends b/c they are tax advantages to the firm

Front 78

· Hedge Fund-

Back 78

portfolio managed similar to a mutual fund, but it has fewer restrictions b/c it deals with sophisticated investors ($$$), over 1 trillion of assets, hedges bets by buying a company and short something else. Ex. Buying GAP but shorting the retail market

Front 79

· Open ended mutual funds

Back 79

funds that do not have a fixed amount of outstanding shares issued and redeemed at net asset value

Front 80

· Net Asset Value (NAV)-

Back 80

(Market Value of funds securities – its liabilities)/Number of shares outstanding

Front 81

· Closed ended funds-

Back 81

the number of shares if fixed and there are no changes in shares outstanding, price is often below the NAV (trades at a discount

Front 82

· Cash drag-

Back 82

a problem that open ended funds have; arises because open ended funds allow their investors to put in or take out cash at will so the fund has to keep a cash reserve reducing returns

Front 83

· Operating expenses-

Back 83

management fee

Front 84

· 12b-1 fees-

Back 84

investors are charged for advertisement of the fund

Front 85

· Front end load-

Back 85

- a commission paid when you purchase shares

Front 86

· Back end load

Back 86

a commission paid when you sell shares

Front 87

· Elliot Spitzer

Back 87

governor of NY, former attorney general, handled finicial cases with mutual funds dealing with timing and late trading

Front 88

· Bear Market

Back 88

stocks are going down and revenues of mutual funds are decreasing

Front 89

· Late trading-

Back 89

trading after the 4:00 deadline and using information (earnings reports) to gain an advantage

Front 90

· Debentures

Back 90

unsecured bonds issued by companies

Front 91

· Zero Coupon Bonds (ZCB)-

Back 91

pay a single payment in the last

Front 92

· Coupon Rate

Back 92

annual coupon / par value

Front 93

· Current Yield

Back 93

annual coupon / bond price

Front 94

· YTM-

Back 94

the Internal Rate of Return that makes the NPV=0, interest rates

Front 95

· Duration

Back 95

measures the combined effect of maturity, coupon rate, and YTM on bond’s price sensitivity, weighted average maturity of the bonds cash flows

Front 96

Duration Facts

Back 96

1. Longer maturity, longer duration
2. duration increases at decreasing rate
3. higher coupon, shorter duration
4. higher yield shorter duration

Front 97

· Bottom-up

Back 97

pick stocks that you think will outperform the S&P, Lynch picked small growth stocks using this strategy, Smith followed a similar strategy

Front 98

· Top-Down-

Back 98

pick stocks from a sector, Vinik picked TECH stocks and then sold them in the fall of 94 the worst time to ever sell TECH stocks.

Front 99

· Front running-

Back 99

a broker trading his own order before a clients for personal benefit, it is illegal, but it happens

Front 100

· Malkiel’s Bond Theorems
1

Back 100

1. Bond Prices move inversely with interest rates

Front 101

· Malkiel’s Bond Theorems
2

Back 101

2. An increase in a bond’s yield to maturity results in a smaller price change than a decrease in yield of equal magnitude

Front 102

· Malkiel’s Bond Theorems
3

Back 102

3. Prices of long-term bonds tend to be more sensitive to interest rate changes than prices of short term bonds.

Front 103

· Malkiel’s Bond Theorems
4

Back 103

4. The sensitivity of a bond prices to changes in yields increases at a decreasing rate as maturity increases

Front 104

· Malkiel’s Bond Theorems
5

Back 104

5. Interest rate risk is inversely related to the bond’s coupon rate. Prices of high coupon bonds are less sensitive to changes in interest rates than prices of low coupon bonds. This is b/c with high coupon bonds you get cash back right away

Front 105

· Malkiel’s Bond Theorems
6

Back 105

6. Zero coupon bonds are the most sensitive to interest rate risk

Front 106

· Malkiel’s Bond Theorems
7

Back 106

7. The sensitivity of a bond’s price to a change in its yield is inversely related to the YTM. Ex. A change in YTM from 19-20% is not a big deal, while a change from 3-4% will have a larger effect.