Finance Ch.2

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Commercial bank

Back 1

A financial institution that accepts demand deposits, makes loans, and provides other services to the public. Ex. chase bank.

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Defined benefit plans

Back 2

A company retirement plan, such as a pension plan, in which a retired employee receives a specific amount based on his or her salary history and years of service. Commonplace in the old days. Usually based off of years working with the company.

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Defined contribution plans

Back 3

A company retirement plan, such as a 401(k) plan in which the employee elects to contribute some amount of his or her salary to the plan and the employee takes responsibility for the investment decisions.

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Accredited investor

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Investor who is permitted to invest in certain types of high risk investments. These investments include wealthy individuals, corporations, endowments, and retirement plans.

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Capital market

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The market for long-term financial instruments. Ex. U.S. treasury bonds. U.S. needs to raise funds so they issue bonds to fund a project.

* Treasury Bills have maturities of one year or less.
* Treasury Notes have maturities of two to ten years.
* Treasury Bonds have maturities greater than ten years.

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Credit default swap

Back 6

An insurance contract that pays off in the event of a credit event such as default or bankruptcy.

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Exchange traded fund (ETF)

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An investment vehicle traded on stock exchanges much like a share of stock. The entity holds investments in assets that meet the investment objective of the entity (e.g.(for example), shares of stock of companies from emerging markets).Ex. S&P 500 or the DOW jones industrial average.

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Financial intermediaries

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Institutions whose business is to bring together individuals and institutions with money to invest or lend with other firms or individuals in need of money. They bring borrowers and savers together.

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Hedge fund

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An investment fund that is open to a limited range of investors (accredited investors) and that can undertake a wider range of investment and trading activities that other types of investment funds that are to the general public (e.g. mutual funds). Management fees are higher then other investments.

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Investment bank

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A financial institution that raises capital, trades in securities , and manages corporate mergers and acquisitions. Ex. Merril Lynch.

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Investment company

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A firm that invests the pooled funds of individual savers and invests the money.

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Leveraged buyout fund

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A private equity firm that raises capital from individual investors and uses these funds along with significant amounts of debt to acquire controlling interests in operating companies. ex. Cerberus capital management.

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Load fund

Back 13

A mutual fund that charges investors a sales commission called a "load".

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Money market

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the financial market for short term debt securities (maturing in one year or less).

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Mutual fund

Back 15

A professionally managed investment company that pools the investments of many individuals and invests it in stocks, bonds, and other types of securities. You can only buy and sell shares in the mutual fund directly from the mutual fund itself. The price you pay is based off of NAV. Mutual funds and ETFS are good in that instead of contacting each company individually and buying stock by paying commission fees, you can buy a portfolio of 50 or more stocks with just one transaction.

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Net asset value (NAV)

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The difference between the current market value of an entity's (such as a mutual fund) assets and the value of its liabilities. It is calculated daily based on the total value of the fund, divided by the number of mutual fund shares outstanding. As fund investments go up o does the funds shares.

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No-load fund

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a mutual fund that doesn't charge a commission.

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Private equity firm

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A financial intermediary that invests in equities that are not traded on the public capital markets. Ex. venture capital firms, and Leveraged buyout firms.

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Venture capital firm

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An investment company that raises money from investors and uses the proceeds to invest in new start-up companies.

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Bond

Back 20

A long term 10 year or more promissory note issued by a borrower, promising to pay the owner of the security a predetermined amount of interest each year.

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Common stock

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A form of equity security that represents residual ownership of the firm. They earn their return after all other security holder claims (debt and preferred equity).

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Coupon rate

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the amount of interest paid per year expressed as a percent of the face value of the bond. Ex. coupon rate of two payments per year at 8%.

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Debt securities

Back 23

financial instruments that represent loans to corporations. Long-term debt securities are called bonds and can be brought and sold in the bond market.

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Equity securities

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Financial instruments that represent ownership claims on a business. Equity securities for corporations are called shares of stock and can be bought and sold in the stock market.

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Face, or par value

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On the face of a bond the stated amount that the firm is to repay on the maturity date.

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Maturity

Back 26

the date when a debt must be repaid.

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Note

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Another term used to refer to indebtedness. Notes generally have a maturity between 1 and 10 years when originally issued.

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Organized security exchanges

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Security exchanges that physically occupy space (such as a building or part of a building) and trade financial instruments on their premises.

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Over the counter markets

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All security markets except the organized exchanges. NYSE is a hybrid over the counter and organized exchange. NASDAQ is a screen based floorless market formed in 1971. pg. 29

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Proprietary trading

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using the banks capital to make speculative bets on derivatives and securities.

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Preferred stock

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an equity security that holds preference over common stock in terms of the right to the distributions of cash (dividends) and the right to the distribution of proceeds in the event of the liquidation and sale of the issuing firm. Sometimes has an accrue feature where missed dividends will accrue and will have to be eventually paid.

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Primary market

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Issuer.A part of the financial market where new security issues are initially bought and sold. Firms selling the securities actually receive the money raised.

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Secondary market

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Reseller. The financial market where previously issued securities such as stocks and bonds are bought and sold.

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Security

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A negotiable instrument that represents a financial claim that has value. Securities are broadly classified as debt securities (bonds) and equity securities (shares of common stock).

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Borrowers

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Those who need money to finance their purchases

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Savers (Investors)

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Those who have money to invest. They save up money for things like college.

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Financial institutions (intermediaries)

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The financial institutions and markets that help bring borrowers and savers together.

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Non-Bank financial intermediaries

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Insurance companies (AIG), Investment banks (Goldman sachs), Investment companies (mutual funds, hedge funds, etc.),, and financial service corporations such as GE Capital division.

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Cost of mutual funds

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According to J. Siegal, mutual funds only beat the S&P 3 years between 1982 and 003. In general index funds perform better than actively managed funds.

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Glass Steagal act or the national banking act of 1933

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Seperated commercial banks from the investment industry. Commercial banks couldnt speculate. Was repealed in 1999.

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DOD frank wall street reform and consumer protection act

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passed in 2010. Created volker rule which prohibits banks that take deposits from proprietary traded (which is using the banks capital to make speculative bets on derivatives and securities.

Front 42

What are the three principal sets of players that interact in the financial markets?

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Borrowers, lenders, and financial intermediaries or financial institutions such as banks.

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What is a financial intermediary?

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A firm that collects money from savers, bundles it into attractive sizes with attractive terms.

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List and describe the principal types of financial intermediaries in the U.S. financial markets.

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Commercial banks (take deposits and give loans).

Non-bank financial intermediaries (do not take deposits and give loans) include financial services corporations (provide loans and credit, gains money by issuing bonds, and interest on loans), insurance companies (offer a premium they use to give money to claims), and investment banks (financial advisors),

Investment companies (take savings and invest them into securities). ex. Mutual funds (pool money for investments (ex. stock, 10 ppl for 1 stock means everyone owns 1/10 of the stock, thus each person has a proportional share of the fund)), exchange traded funds (ETFs)(traded on an exchange), hedge funds (high risk mutual funds), and Private equity funds (private not publicly traded) the two categories are venture capital funds, and leveraged buyout funds.

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What do investment banks do in the financial markets?

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Investment banks such as goldmans sachs advise companies on their financial decisions and help act as an intermediary when a firm wants to issue securities.

Front 46

Describe the difference between the primary market and the secondary market.

Back 46

The primary market is when you deal with the firm issuing the securities directly (new). The secondary market is when you buy off hand securities that have are being resold by the secondary institution.

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What is a mutual fund, how is it different than an ETF?

Back 47

A mutual fund is firm that uses the money it gets from investors to invest by the manager. Beneficial in that it is easy to have a diverse portfolio, access to easy investments plans, and access to profeshional opinion.

An ETF's shares can be sold multiple times a day, while mutual funds can only be sold once a day.

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What is the difference between a debt security and an equity security?

Back 48

Debt is the company trying to raise money by bonds, and equity is a unit of ownership. Debt securities get paid before equity, and have specified contracts that give promised payments., while equity has no such assurances, in fact apple hasn't paid dividends to shareholders in over a decade.. Equity however may have more returns.

Front 49

What makes preferred stock preferred?

Back 49

Has priority to dividends and assets from liquidation, in other words common stockholders receive their crap last. Preferred usually does not have voting rights.

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What is a hedge fund, how is it different than a mutual fund?

Back 50

A hedge fund is high risk, and is less regulated than mutual funds.

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What are the two types of private equity funds? what does each do with the money it raises from investors?

Back 51

The two types are leveraged buyout firms, and venture capitalist firms. Venture firms help new firms grow, and LBO (leveraged buy out firms) buy out old firms and makes them perform better.