Investment Exam 1: Chapter 2

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Money Market

Back 1

Very short-term, highly liquid, relatively low-risk debt instruments

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U.S. Treasury Bills (T-Bills)

Back 2

Short-term government securities issued at a discount from face value and returning the face amount at maturity

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Certiface of Deposit (CD)

Back 3

A bank time deposit: Interest and principal paid back on certain date

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Commercial Paper(CP)

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Short-Term unsecured debt issued by large corporations

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Bankers' acceptance

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An order to a bank by a customer to pay a sum of money at a future date

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Eurodollars

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Dollar-denominated deposits at foreign banks or foreign branches of American banks

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Repurchase Agreements (Repos)

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Short-term sales of government securities with an agreement to repurchase the securities at a higher price

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Federal Funds

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Funds in the accounts of commercial banks at the Federal Reserve Bank

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LIBOR(London Interbank Offer Rate)

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Lending rat among banks in the London Market

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Treasury Notes or Bonds

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Debt obligations of the federal government with original maturities of one year or more

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Inflation-Protected Treasury Bonds (TIPS)

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Principal amount is adjusted in proportion to increases in the CPI

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Municipal Bond (Munis)

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Tax-exempt bonds issued by state and local government

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Equivalent Taxable Yield of Tax-Exempt Bond

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r(1-t)=rm

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Corporate Bonds

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Long-term debt issued by private corporations typically paying semiannual coupons and returning the face value of the bond at maturity

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Common Stocks

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Ownership shares in a publicly held corporation.

Shareholders have voting rights and may receive dividends.

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Characteristics of Common Stock

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1. Residual claim: stockholders are the last in line of all those who have a claim on assets and income of the corporation

2. Limited Liability: you lose what you invested

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Preferred Stock

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Nonvoting shares in a corporation, usually paying a fixed stream of dividends

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ADRs

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traded in U.S. markets that represent ownership in shares of a foreign company

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Dow Jones Industrial Average (DJIA)

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30 large blue-chip corporations

computed since 1896

Measures performance on a portfolio that holds one share of each stock so it is a price-weighted average

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Standard & Poor's Composite 500 (S&P 500)

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500 firms

Market Value-weighted index

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Equally Weighted Indexes

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An index computed from a simple average of returns

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Foreign Stock Indexes

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FTSE, Nikkei, DAX, Hang Seng

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Derivative Assets

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A security with a payoff that depends on the prices of other securities

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Call Option

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The right to buy an asset at a specified price on or before a specified expiration date

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Put Option

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The right to sell an asset at a specified price on or before a specified expiration date

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Futures Contract

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Obliges traders to purchase or sell an asset at an agreed-upon price at a specified future date