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84 Cards in this Set
- Front
- Back
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Financial market
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A mechanism used for trading securities.
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Elements of a financial market
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-Item traded
-Buyer -Seller -Individual to organize the market (NYSE, NASDAQ) |
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Securities
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Written instruments representing either money or other property, such as stocks and bonds.
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Money market
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A financial market in which short-term securities are traded.
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Capital market
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A financial market in which long-term securities are traded.
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Demand for and supply of capital
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The typical users are corporations and government. In the form of mortgages, corporate and foreign bonds, common and preferred stock, shortterm business borrowing, consumer credit, bank loans, other loans and advances, and federal, foreign, state and local government debt.
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Primary market
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A mechanism in which new securities are sold, with the proceeds going direclty to the issuer.
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Four types of primary market structures
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-Direct search
-Broker -Dealer -Auction |
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Broker market
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Brokers find trading partners to negotiate transactino prices for their clients in return for a fee.
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Dealer market
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Buying and selling their own accounts at quoted prices.
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Bid price
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The price a dealer is willing to pay for a security.
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Asked price
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The price at which a dealer is willing to sell a security.
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Bid-asked spread
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The difference between the bid price and the asked price for a security.
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Auction markets
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Allow investors to participate in a single price-setting process, virtually eliminating the search for the best price associated with broker and dealer markets.
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Secondary market
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A mechanism for investors to buy and sell previously issued securities.
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OTC
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Over the counter. Stocks that are not listed for trading on an organized exchange.
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Market depth
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The ability of the market to handle a large number of securities transactions without a significant effect on prices.
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Market breadth
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The percentage of the overall market that is participating in the markets up and down move.
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Classifications of bonds
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-Federal debt
-Corporate -State and local debt -International |
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Bonds-Federal debt
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Treasury debt.
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Treasury bills
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T-bills - have maturities of one year or less, are sold at a discount from face value, and are repaid at face value.
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Treasury notes
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T-notes - range in maturity from two to ten years, have a stated coupon rate, and pay coupons twice a year.
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Treasury bonds
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T-bonds - have a maturity of thirty years, have a stated coupon rate and pay coupons twice a year.
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Treasury inflation protected securities
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TIPS - are securities whose principal is tied to inflation, specifically the Consumer Price Index.
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Corporate bonds
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Agreement between a corporation (borrower) and an investor (lender).
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State and local debt
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Debt securities from this source are called municipal bonds.
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General obligation bond
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A municipal debt instrument secured by the full faith, credit, and taxing authority of the issuing state or municipality.
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Revenue bond
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A municipal debt instrument that is payable entirely from revenue received from the users or beneficiaries of the projects financed.
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International bond
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Eurobonds and foreign bonds
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Eurobond
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A long-term debt instrument that is denomincated in U.S. dollars or another currency and that is offered and issued outside the issuers country of origin.
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Bond
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A long-term debt instrument that requires the issuer to pay a set annual rate of interest and to repay the borrowed sum on a specified date.
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Indenture agreement
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A legal document that details the terms of a bond.
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Maturity date
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The date on which a bonds principal or par value becomes payable to the bond holder.
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Principal
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In finance, the amount borrowed under a loan.
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Face value
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A bonds original value and the amount that will be paid at the bonds maturity date.
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Indenture agreement components
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-Maturity date
-Principal -Interest rate -Rights and duties of the issuer and the buyer of the bond. |
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Coupon rate
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A bonds annual interest rate stated as a percentage of its par value.
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Coupon
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The amount of interst to be paid on the dates specified in an indenture agreement.
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Bonds that have additional features
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-Convertibility
-Guarantees -Serial maturities -Participation in company earnings -Adjustiable or variable rates -Call provisions -Deep discount -Sinking fund Bonds with basic components are called straight bonds. |
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Convertible bond
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A debt instrument that gives the holder the option to convert the bond into another security (generally common stock) of the issuing company at a specific price, within a given time and under stated terms.
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Guaranteed bond
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A debt instrument guaranteed by an entity other than the issuer.
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Floating rate bond
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A debt instrument that pays interest at a rate that is indexed to the rates of the U.S. Treasury securities or other money market instruments.
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Callable bonds
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A debt instrument that gives the issuer the right to pay off the bond before maturity.
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Zero-coupon bonds
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A corporate bond that does not pay periodic interest income.
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Sinking fund provision
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A provision that requires a bond issuer to set aside money at periodic intervals for the specific purpose of repaying a portion of its existing bonds each year.
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Collateralized bonds
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Backed by specific assets of the issuer.
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Secured bond
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A debt instrument that is secured by specific assets and has priority over the funds received in the liquidation of those assets.
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Debenture bond
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A debt instrument that is an unsecured general obligacation of the issuing corporation.
Unsecured bonds. |
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Asset-backed security
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A financial instrument collateralized by a pool of loans, leases or other receivables.
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Mortgage-backed security
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A financial instrument collateralized by a pool of mortgages.
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Yield to maturity (YTM)
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A measure of the total rate of return a bondhold will earn over the life of the bond if it is held to maturity.
Yield demanded is based on credit risk, liquidity risk and terms to maturity. |
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Credit risk
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The risk that customers of other creditors will fail to make promised payments as they come due.
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Investment grade bond
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A bond issued that receives one of the top for investment quality ratings from one or both of the two main bond rating agencies, Moodys and Standard & Poors.
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Junk bond
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A bond that receives a BB/Ba rating or lower from one or both of the two main bond rating agencies, Standard & Poors or Moodys.
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Liquidity risk
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The risk that an asset cannot be sold on short notice without incurring a loss.
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Liquidity premium
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An additional return to compensate investors for the relative liquidity of an investment. The more illiquid an investment, the higher the return demanded by investors.
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Term structure
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The effect on a bonds price of the length of time to maturity.
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Yield curve shapes
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-Upward sloping-long-term interest rates above short-term rates.
-Flat-short and longer-term rates equal -Downward sloping-long-term interest rates below short-term interest rates. |
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Maturity premium
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For a given security, the difference in yield between one term of maturity and another.
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Yield to maturity
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Required rate of return by the marketplace.
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Real rate of return
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The rate of return adjusted for the effects of inflation.
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Inflation premium
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An increase in return on a security to account for an expected decrease in purchased power associated with price inflation.
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Market price of a bond
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Fluctuates over its life based on factors that influence yield to maturity, including the real rate of return, inflation premium, and risk premium.
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Stocks
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Represent ownership units in the company that has issued the stock.
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Preferred stock
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Stock that is generally nonvoting but that has priority over common stock, usually regarding dividends and capital distribution if the corporation ends its existence.
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Cumulative preferred stock
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A security that gives the holder the right to receive accrued unpaid dividends before any dividends can be paid to the common stockholders.
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Noncumulative preferred stock
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A security that does not give the holder the right to receive accrued unpaid dividends.
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Fundamental analysis
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A method used to determine the price of a stock by analyzing data that are fundamental to the company, such as expected growth, dividend payouts, risk and interest rates.
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Dividend payout ratio
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Dividends paid / earnings
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Key determinants of a stocks price
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-Expected growth rate of earnings
-Sales stability -Dividend payout ratio -Financial leverage -Institutional stock ownership |
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Technical analysis
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A method of determining stock prices by trying to detect patterns in market activity statistics, past prices and market volume.
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Efficient market hypothesis
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Stock prices reflect the expectations of all market participants and that no individual investor has superior knowledge.
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Three forms of efficient market hypothesis
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-Weak form efficiency-Historic data
-Semi-strong form efficiency-Historic data & current information -Strong form efficiency-Historic data and current public information |
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Annual return components
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-Periodic payments in the form of bond interest or stock dividends.
-A capital gain or loss based on the change in the value of the bond or stock from the beginning of the year to the end of the year. |
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Annual rate of return for a bond
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(Interest + capital gain) / bond price at the beginning of the year.
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Annual rate of return for a stock
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(Capital gain + dividend) / Share price at the beginning of the year.
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Amoritzed cost
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An accounting recognition of the difference between a bonds purchase price and face value from purchase date to maturity.
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Fair value
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Equal to market value if a bond or stock is actively traded.
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Mark-to-market
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An adjustment in an assets valuation to reflect changs in its actual or estimated market price.
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International Financial Reporting Standards
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IFRS - Financial standards developed by the International Account Standards Board (IASB)
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Realized capital gain
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The profit earned by an insurer when an asset, such as a bond or stock, is sold for more than its cost.
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Unrealized capital gain
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The profit not yet earned on a held asset when it exceeds its original purcahse price but has not been sold.
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Impairment
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In accounting, the reduction in the cost basis of a financial asset by an amount that is deemed to be unrecoverable.
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Cost
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A method used for either stocks or bonds that values the investment at its purchase price plus any costs associated with the purchase.
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