Fabozzi Chapter 3 And 10

Front 1

What are two qualities of a competitive market?

Back 1

lowest costs + efficient

Front 2

What is a market failure?

Back 2

something mechanisms of competition and pricing could not handle

Front 3

What do regulations do?

Back 3

1. prevent issuers of securities from defrauding investors by withholding information
2. competition/fairness
3. stability
4. restrict foreign influences
5. control level of economic activity

Front 4

What are disclosure regulations?

Back 4

companies must make everything public

Front 5

What is asymmetric information?

Back 5

when managers/investor have unequal access to information; aka insider trading

Front 6

What is the agency problem?

Back 6

managers in it for themselves

Front 7

What are the Securities Act of 1933 and the Securities Exchange Act of 1934?

Back 7

SA 33- disclosure regulations; issuer cannot be deceitful
SE 34- deals with periodic disclosure of company information
SEC empowers both acts

Front 8

What is the National Association of Securities Dealers (NASD)?

Back 8

SRO- self regulatory organization- regulates conduct in issuing securieties and selling them to the public

Front 9

What two organizations regulate the options and futures market?

Back 9

CFTC- Commodity Futures Trading Commission- licences and monitors futures exchanges; authorizes firms
SEC- oversees options market when underlying asset is equity

Front 10

What is the NFA?

Back 10

National Futures Association- SRO that assists CFTC

Front 11

What does the FED do?

Back 11

responsible for nation's money and banking system; sets minimum requirements for amount of equity (shareholder contributions) that banks must have relative to their assets

Front 12

What is the OTS?

Back 12

Office of Thrift Supervision- monitors loans

Front 13

What does the International Bank Act of 1978 stipulate?

Back 13

foreign banks must select a home state and abide by geographical regulations

Front 14

Key Points about Japanese Regulation

Back 14

regulator: Ministry of Finance
exchange: Tokyo Stock Exchange
unlike US: direct funding in bond markets only goes to large firms; debt securities can be issued whenever; banks can invest substantial sums in publicly traded firms (cannot do in US); foreign stocks are listed on TSE
notes
commercial banks can do investment banking/issue securities through a subsidiary

Front 15

Key Points about German Regulation

Back 15

regulator: Bundesbank (central bank)
once claimed to weak on disclosure regulation; bond market is weak because cumbersome Bundesbank must approve issuances; insider trading law in 1994; regulations less stringent than US; universal banks take part in all types of financial activity; 8 stock exchanges; European Central Bank controls money supply; 1/3 of shares on main stock market are foreign

Front 16

Key Points about England Regulation

Back 16

regulator: Department of Trade and Industry
Securities and Investment Board = SEC
Bank of England = Fed
stock exchange = London International Stock Exchange; numerous foreign companies listed on LISE
notes: banks can own subsidiaries that are listed on the stock exchange

Front 17

What are the reasons for regulation reform?

Back 17

1. avoid crises: 1987 stock crash; interest rate ceiling and well-being of US banks and S&Ls
2. financial innovation regulation- like inception of derivatives (1980s)
3. globalization- don't want too strong regulations to force institutions away

Front 18

What are the 11 properties of financial assets?

Back 18

1. moneyness
2. divisibility and denomination
3. reversibility
4. cash flow
5. term to maturity
6. convertibility
7. currency
8. liquidity
9. return predictability
10. complexity
11. tax status

Front 19

What is moneyness?

Back 19

how easily can the asset be transformed into money- costs, delay, risk?; near money- time and savings deposits, Treasury bill

Front 20

What are divisibility and denomination?

Back 20

minimum size in which a financial asset can be liquidated and exchanged for money; many bonds come in $1,000 denominations, commercial paper $25,000 units, certificates of deposit in $100,000; divisibility is desirable for inverstors but not for borrowers

Front 21

What is reversibility or turnaround cost?

Back 21

cost of investing in a financial asset and then getting out of it and back into cash again; determinants- bid-ask spread, commissions

Front 22

What does thickness of the market mean?

Back 22

thick market- many transactions
thin market- not many transactions
thicker market makes assets more reversible

Front 23

What is cash flow?

Back 23

the return that an investor will realize by holding a financial asset: dividends, coupon payments on bonds, stock price gains

Front 24

What is term to maturity?

Back 24

length of period until instrument makes its final payment or owner is entitled to demand liquidation

Front 25

What are demand instruments?

Back 25

checking accounts- creditor can ask for repayment whenever

Front 26

What is a perpetual or consul?

Back 26

promises to pay a fixed amount per year indefinitely and not to repay the principal

Front 27

What are call provisions?

Back 27

debtor can repay in advance

Front 28

What is a put option?

Back 28

investor can ask for early repayment

Front 29

What is convertibilty?

Back 29

ability to convert assets in one class or among classes

Front 30

What is a convertible bond?

Back 30

a bond that the holder can change into equity shares

Front 31

What is currency?

Back 31

must take into consideration currency ratios

Front 32

What is liquidity?

Back 32

how much sellers stand to lose if they wish to sell immediately as against engaging in a costly and time-consuming search
illiquid assets: stock of small company, bond issued by small school district- thin market

Front 33

What are some determinants of liquidity?

Back 33

1. is the market thick or thin?
2. contractual agreements
3. quantity of asset to be sold

Front 34

What is return predictability?

Back 34

how much return volatility is there?; how risky are the cash flows?

Front 35

What is complexity?

Back 35

some assets are combinations of two or more simpler assets; must break them down to find value
complex assets: convertible bond, bond that has payments that can be made in different currency

Front 36

What is a callable bond?

Back 36

issuer who can repay debt prior to maturity

Front 37

What is a putable bond?

Back 37

bond that can be sold back to the issuer at a fixed price

Front 38

What is tax status?

Back 38

different assets are taxed differently; different geographical places have different taxes; different years have different taxes

Front 39

What is present value?

Back 39

correct price of an asset equals present value of all cash flows that the owner of the asset expects to recieve during its life

Front 40

What is the discount rate?

Back 40

return that the market requires on an asset; sum of real rate of interest; inflation premium; default risk premium; maturity premium; liquidity premium; exchange-rate risk premium

Front 41

What is duration?

Back 41

the approximate percentage change in price for a 100 basis point change in interest rates around the prevailing yield; the larger the yield change, the poorer the approximation that duration provides

Front 42

What is the difference between modified duration and effective duration?

Back 42

effective duration takes into account the cash flow changes that occur when the interest rate changes