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149 Cards in this Set
- Front
- Back
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1913 Federal Reserve Act |
Created the current Federal Reserve system. Establish form of central bank. |
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abnormal return
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the return generated by a security that is different than the expected return
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accredited investors
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investors who are financially sophisticated and have a reduced need for the protection provided by certain government filings.
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accrued interest
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interest earned since the last coupon payment
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ADR
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American Depository Receipts, Negotiable certificate issued by US bank representing a specified number of shares in a foreign stock traded on US exchange
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Amortized
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the principal and interest are paid in equal installments over the life of the loan. Initial payments are mostly interest.
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ask price
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price the seller is willing to accept for a security
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ask yield
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bond equivalent yield on the investment. Assume that investors buy at the dealer’s ask rate. Straight yield if <= 182 days. Long equation if not.
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authorized shares
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maximum number of shares a firm may issue
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banker’s discount
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the interest on short term money market instruments like commercial papers and tbills. Based on par value and amount of discount
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bankers’ acceptance
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early used to finance international trade. Now most are third country acceptances
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Beta (CAPM)
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the index of market sensitivity
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bid price
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price the buyer is willing to pay
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bid-ask spread
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difference between highest price buyer is willing to pay and lowest price seller is willing to sell.
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Blue Sky laws
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laws designed to protect investors from securities fraud at the state level
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bond
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a debt investment in which the investor loans money to an entity that borrows the funds for a defined period of time
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bond equivalent rate
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calculation for restating semi-annual, quarterly, or annual discount bond into an annual yield.
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bonds at premium
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trading above its par value, coupon rate is higher than interest rate
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bonds at discount
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trading at less than its par value, coupon is less than interest rate
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bootstrapping
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build company from personal finances or procedure used to calculate the zero-coupon yield curve from market figures
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call provisions
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a provision on a bond that allows the original issuer to repurchase and retire the bonds
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capital gains
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an increase in the value of an asset that gives it a higher worth than its purchase price
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CAPM
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Portfolios seeking higher returns, must have higher risk. CAPM quantifies the relationship between increased risk and returns
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Certificates of Deposit
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debt instruments issued by banks.
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commercial paper
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short term promissory note with a fixed maturity. Debt of the issuer, generally a corporation.
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common stock
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a security that represents ownership in a corporation. Bottom of the liquidation ladder.
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Compounding
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the ability of an asset to generate earnings, which are then reinvested in order to generate their own earnings
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Convexity
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a measure of the curvature between in the relationship between bond prices and bond yields that demonstrates how the duration of a bond changes as interest rate changes.
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coupon / coupon rate
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the principal portion of the loan is repaid at maturity. Interest is specified at a percent of the principal and paid periodically.
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debt markets
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corporations, gov, etc. borrow money in financial markets. Debt markets facilitate buying and selling of these debt instruments. Must agree on the price today of the remaining payments specified by the debt instruments.
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declaration date
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Date which the board of directors officially declares the dividend. Announces dividend amount.
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default risk
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the event where companies or individuals are unable to make the required payments on their debt obligations
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discount paper
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the debt is specified with the given principal to be paid at maturity. Purchased at less than its face value
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discount window
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The Fed. Reserve maintains a discount window where member banks can borrow funds at the discount rate, provided the bank puts up acceptable collateral
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discounting
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the process of determining the PV of a payment or stream of payments that is to be received in the future. TVM
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diversification
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mixes a wide variety of investments in a portfolio to reduce risk
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Dodd-Frank Wall Street Reform and Customer Protection Act of 2010
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Dodd Frank established a Financial Stability Oversight Council (FSOC) with broad authority over money and finance and requires gov. agencies to write rules and regulations on almost every aspect of commerce.
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Dow Jones Industrial Average
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longest running stock market index. 30 large, well-known industrial stocks.
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Duration
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a measure of the sensitivity of the price of a fixed-income investment to a change in interest rates. On average, how long does it take to recover money.
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EDGAR
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Electronic Data Gathering, analysis, and retrieval system. Performs automated indexing, collection, validation, and forwarding of submissions by companies required to fill forms with the SEC
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effective annual rate
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an investment’s annual rate of interest when compounding occurs more often than once a year.
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efficient markets hypothesis
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stocks always trade at their fair value, making it impossible to purchase undervalued stocks or sell inflated stocks. Share prices always reflect all information.
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efficient portfolio
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a portfolio is efficient if expected return cannot be increased without also increasing risk. Also inversely.
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Emergency Economic Stabilization Act of 2008
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authorized the US treasury to spend up to $770 billion to purchase distressed assets, especially mortgage-backed securities and to invest directly in banks through the Troubled Asset Relief Program.
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ex-dividend date
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Day at which the stock trades without the dividend. 2 business days before the record date.
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expected value
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anticipated value for an investment. Statistical return. Multiply possible outcomes with probability outcome will occur.
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Federal funds
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all banks and depository institutions are members of the Federal Reserve System and required to keep reserves on deposit at their bank. Banks temporarily short on their reserve requirements can borrow short term funds.
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flat yield curve
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little difference between short-term and long-term rates of bonds
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flipping
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buying IPOs at the offer price and selling them in the first day of trading, usually at a substantial profit. Associated with institutional investors.
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forward rate
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A rate applicable to a financial transaction that will take place in the future. Forward rates are based on the spot rate, adjusted for the cost of carry and refer to the rate that will be used to deliver a currency, bond or commodity at some future time.
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front running
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unethical practice of trading an equity based on information from the analyst department before his/her clients have been given information
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fundamental analysis
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evaluation of the economic and financial information relevant to a corporation’s future earnings and growth. Semistrong analysis
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FV (future value)
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the value of an asset at a specified date in the future
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good-til-cancelled order
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also called open order, stays on the books until executed or cancelled by the client.
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Haircut
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the margin protects the lender against simultaneous default and a decrease in the value of the collateral security below the value of the loan.
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high-frequency traders
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trading platform that uses powerful computers to transact a large number of orders at very fast speeds.
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immunization
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a strategy that matches the duration of assets and liabilities thereby minimizing the impact of interest rates on the net worth.
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inflation
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the rate at which the general level of prices is rising, and therefore purchasing power is falling.
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insider trading
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strong form of efficiency, access to confidential information.
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interest at maturity
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the principal portion of the loan plus interest is paid at maturity
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interest rate
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The fee charged by a lender as a percent of the principal
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internal rate of return (IRR)
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the rate that will make the net present value of all the cash flows to termination equal to zero
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inverted yield curve
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an environment where long term debts have a lower yield than short term debt instruments. Rarest of the 3 forms
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investment bank
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financial intermediary between companies and investors. Underwrite debt and equity issues and advise M&As
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Investment Company Act of 1940
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regulates financial intermediaries that pool investor money into trusts, mutual funds and other entities designed to manage portfolios of financial assets. These trusts and funds are required to disclose investment objectives, practices, and financial assets.
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invoice price
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a commercial document that itemizes a transaction between a buyer and a seller
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IPO
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first offer of partnership in a company to the general public
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Jensen’s alpha
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a measure of the abnormal return as defined by CAPM. Expected minus CAPM.
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Leverage
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amplification in the return earned on equity when the investment is financed through debt. Leverage= 1/margin.
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LIBOR
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benchmark rate that the world’s leading banks charge each other for short term loans.
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limit order
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instruction to buy or sell at certain price or better
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liquidity
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an asset can be bought or sold quickly at a price close to the previous transaction. Can detect through price continuity and depth
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listing
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only issues listed with the exchange may trade. To be listed, must satisfy specific requirements in terms of shares, shareholders, etc.
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margin
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percent of stock for which you must deposit money
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margin (initial and maintenance)
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initial margin deposit the investor must make to make the purchase. Maintenance minimum the investor must keep in the margin account when stock price changes
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margin call
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when the minimum margin requirement is no longer met and broker requires additional funds to be deposited.
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market (or at the market) order
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buy or sell immediately at the best price available.
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market capitalization
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the total dollar market value of all of a company’s outstanding shares. Is calculated by multiplying current shares by current market price.
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market if touched order
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a conditional order that becomes a market order when a security reaches a specified price
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market maker
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a broker-dealer firm that accepts the risk of holding a certain number of shares of a particular security in order to facilitate trading in that security.
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maturity
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the date on which the principal on the load is to be repaid
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modified duration
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expresses the measurable change in the value of a security in response to a change in rates.
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money market yield
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the return on the investment, prorated to a 360 day year. Yield = (interest/investment) * (360/days)
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NASDAQ
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global electronic marketplace for buying and selling securities as well as benchmark index for U.S. tech stocks. Automated quotation system. Initially NASD and had OTC trading. Pink sheets
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NFV (net future value)
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a value of an asset at a specified date in the future that is equivalent in value to a specified sum today
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normal distribution
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a probability distribution that plots all values in a symmetrical fashion.
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normal yield curve
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yield curve where short term debt instruments have a lower yield than long term debt instruments
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NPV (net present value)
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the difference between the present value of cash inflows and the present value of cash outflows
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optimal portfolio
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cannot increase return without increasing risk.
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outstanding shares
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authorized shares bought and sold by a company
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par
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Nothing more than an accounting device, often set arbitrarily for shares. Stated, or face value of bonds.
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payable date
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date which the dividend is actually paid
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portfolio
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a group of financial assets as well as their exchange-traded counterparts.
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portfolio allocation line (PAL) or capital allocation line (CAL)
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displays to investors the return they can make by taking on a certain level of risk. All combinations of risky and risk-free assets.
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portfolio effect
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The reduction in the value of a portfolio relative to the reduction in value of the individual assets represented in that portfolio.
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preferred stock
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a class of ownership in a corporation that has a higher claim on the assets and earnings (dividends) than common stock
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preliminary prospectus
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A first draft registration statement filed by a firm prior to proceeding with an initial public offering of securities.
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price risk
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the risk in the decline in the value of a security in a portfolio. The biggest risk faced by investors.
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price volatility
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the extent to which the return on an asset will fluctuate between now and the expiration of the asset.
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price-weighted index
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a stock index in which each stock influences the index in proportion to its price per share.
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price-yield curve
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continuum of price and yield combos that results when bond trades in the market.
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principal
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The amount borrowed and repaid. Also called the face value of the debt.
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private placement memorandum
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a report that outlines the current financial status of a company, the management team, and plans for expansion.
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program trades
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Computerized trading used primarily by institutional investors typically for large-volume trades. Orders from the trader's computer are entered directly into the market's computer system and executed automatically.
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PV (present value)
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the current value of a future sum of money given a specified rate of return.
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Rating
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evaluation of the firm’s credit-worthiness by professional service – highest AAA, worst = D
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record date
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date which you must be registered with the corporate trustee as the owner of shares in a company
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Red Herring
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a preliminary prospectus, stating on the cover page in red ink that the registration statement is not yet effective.
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registration statement
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the preliminary prospectus filed with the SEC for approval.
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Regulation T
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initial margin must be no less than 50% of the purchase price of the stock and maintenance margin no less than 25% of the value of the position.
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reinvestment risk
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the risk that future coupons from a bond will not be reinvested at the prevailing interest rate when the bond is initially purchased
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repurchase agreement
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the simultaneous sale and repurchase of a security. A loan with the underlying security as collateral (like pawn shop)
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risk adverse
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An investor who will take on more risk if and only if he is compensated through the expectation of higher returns.
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risk premium
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the expected return on the portfolio in excess of the risk free rate of return
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S&P500 Index
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400 industrials, 40 utilities, 40 financials, and 20 transportation issues. 86% market capitalization of NYSE and 13% NASDAQ.
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Sarbanes-Oxley Act of 2002
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most far-reaching attempts to reform American business practices. Followed bankruptcy of Enron and Worldcom, attempted to address the accounting fraud and lack of financial disclosure. Created the Public Company Accounting Oversight Board to oversee the activities of the accy and audit profession.
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SEC Registration
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all securities offered to the public must be registered with the SEC except issues with boundaries only in one state, issues of $1 million or less, issues not offered to the public.
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Securities Act of 1933
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also known as “the truth in securities” had 2 goals. First, public must be able to access accurate info about the companies they invest in and public must be protected from fraud. Securities offered to public must be registered and include accurate financial statements.
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Securities and Exchange Act of 1934
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Most sweeping federal regulation to date. Established the SEC and gave commission authority to regulate, register and monitor market participants. Require companies to file with EDGAR.
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Securities and Exchange Commission (SEC)
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independent, non-partisan, quasi-judicial agency with the responsibility of administering federal securities laws. Protect investors by having access to all information.
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security market line (SML)
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The relationship described by the CAPM equation. Specifies linear relationship between levels of systematic risk (B) and normal return ( E[R] ).
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semi-strong form efficiency
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fundamental analysis
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settlement date corporate bonds
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the date where the trade on a security must be executed. Settle in three business days
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settlement date Treasuries
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Trade settles on the next business day
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Sharpe ratio
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uses the std. deviation of the returns on the portfolio – measure the ratio of the return earned by the portfolio in excess of the risk free rate. = Rp – rf/std deviation
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short interest
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total number of shares in a company that have been sold short. Short interest = shares short/shares outstanding.
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short sale
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sale of a security that a seller doesn’t own. Speculate that price will fall, then seller will be able to cover the sale by buying it back at a lower price.
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Specialist
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A member of an exchange who acts as the market maker. Holds inventory, bid and ask prices, and manages limit orders.
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spot rate
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price quoted for immediate settlement of a security – based on value of the asset at the moment of the quote.
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standard deviation
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sheds light on historical volatility, volatile stock = high std. deviation
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statistical rate of return
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based on the assumption that the return for each month is independent of the returns on any other month
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stock exchange
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market where securities are bought and sold
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stock split
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when a company redefines its shares into smaller units
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stop limit order
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instruction to buy or sell that becomes a limit order as soon as the market price reaches a certain level
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stop loss order
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sell a security when it reaches a certain price
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strong from efficiency
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insider trading
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systematic risk
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risk that is both unpredictable and impossible to completely avoid. It cannot be mitigated through diversification, only through hedging or by using the right asset allocation strategy.
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technical analysis
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Weak form of efficiency, idea that a pattern of the stock reveals a pattern of demand and supply in the market. Information can be charted, analyzed, and used to reveal strength.
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tick
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smallest price increment. Usually 1 cent.
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ticker
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character code that identifies a security.
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time-weighted rate of return
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assumes a portfolio is completely reinvested at the end of every period. Look at return for when the investor bough, sold and reinvested, time weighted is appropriate. Historical approach.
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Treasury bills
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Issued by the Department of the treasury of the gov. Represent the debt of the gov. and traded on a bankers’ discount basis.
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unsystematic risk
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reflects industry or firm specific forces and can be eliminated through diversification
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value-weighted index
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based on the change in the total market value of the stocks in the sample. Dominated by larger companies. S&P500, NASDAQ100, etc.
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weak form efficiency
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technical analysis
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yield
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income return on an investment. Refers to interest or dividends received from a security
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yield curve
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plots interest rates of bonds but differing maturity dates. Used to predict changes in economic output and growth
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yield illusion
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the assumption that I can reinvest all coupon payments over the life of the bond at the yield to maturity at the time of purchase
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yield to maturity (promised YTM)
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rate of return anticipated on a bond if held to the end of its lifetime. |
