WVU FIN 330 - Exam 2 Study Guide (6 pages)

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Exam 2 Study Guide



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Exam 2 Study Guide

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Pages:
6
Type:
Study Guide
School:
West Virginia University
Course:
Fin 330 - Financial Institutions
Financial Institutions Documents
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Finance 330 5th Edition Exam 2 Study Guide chapters 5 8 Chapter 5 Money Markets Money Markets short term debt instruments are issued by economic agents that require shortterm funds and are purchased by economic agents that have an excess of funds Opportunity Cost cost in the form of forgone interest that result from excessive holdings of cash balances Default Risk the risk of late or non payment of principal interest Money Market Instruments Treasury bills short term obligations issued by the U S government Federal Funds short term fund transferred between financial institutions usually for no more than one day Repurchase agreements agreements involving the sale of securities by one party to another with a promise by the seller to repurchase the same securities from the buyer at a special date and price Negotiable certificate of deposit bank issued time deposit that specifies an interest create and maturity and is negotiable Banker s acceptance time draft payable to a seller of goods with payment guaranteed by a bank Treasury Bill Auctions the formal process by which the U S treasury sells new issues of Treasury Bills Federal Funds Short term transferred between financial insitutions usually for a period of one day Federal Funds Rate the interest rate for borrowing fed funds Correspondent Banks banks with reciprocal accounts and agreements Repurchase agreements agreements involving the sale of securities by one party to another with a promise by the seller to repurchase the same securities from the buyer at a special date and price Repurchase agreements are arranged either directly or indirectly between two parties or with the help of brokers and dealers Reverse Repurchase Agreements an agreement involving the purchase of securities by one party from another party with the promise to sell them back Commercial Paper is an unsecured short term promissory note issued by a corporation to raise short term cash often to finance working capital requirements Commercial paper is sold to investors either directly using the investors own sales force or indirectly through brokers and dealers such as major banks and subsidiaries that specialize in investment banking activities and investment banks underwriting the issues Negotiable certificate of deposit bank issued time deposit that specifies an interest rate and maturity date is negotiable in the secondary market Banks issue negotiable CDs post a daily set of rates for the most popular maturities of their negotiable CDs normally 1 2 3 6 and 12 months Bearer Instrument an instrument in which the holder at maturity receives the principal and interest Banker s acceptance time draft payable to a seller of goods with payment guaranteed bank by a Many banker s acceptances arise from international trade transactions and the underlying letters of credit that are used to finance trade in goods that have yet to be shipped from a foreign exporter to domestic importer Eurodollar Market Market where Eurodollars are traded London Interbank Offered Rate The rate paid on Eurodollars Eurodollar CDs Dollar denominated deposits in non US banks Chapter 6 Bond Markets Capital Markets markets that trade debt and equity instruments with maturities of more than a year Bonds long term debt obligations issued by corporations and government units Bond Markets markets in which bonds are issued and traded Treasury Notes and Bonds are issued by the U S treasury to finance the national debt and other debt and other federal government expenditures Strip Treasury security in which the periodic interest payment is separated from the final principal payment Accrued Interest that portion of the coupon payment accrued between the last coupon payment and the settlement day Municipal Bonds securities issued by state and local county city school and governments Two types of Municipal bonds General Obligation Bonds bonds backed by full faith and credit of the issuer Revenue Bonds Bonds sold to finance a specific revenue generating project backed by cash flows from that project Firm Commitment Underwriting the issue of securities by an investment bank in which the investment bank guarantees the issuer a price for newly issued securities by buying the whole issue at a fixed price from the issuer It then seeks to resell these securities to suppliers of funds investors at a higher price Best Efforts Offering the issue of securities in which the investment bank does not guarantee a price to the issuer and acts more as a placing or distribution agent on a fee basis related to its success in placing the issue Private Placement a security issue placed with one of a few large institutional buyers Corporate Bonds long term bonds issued by corporations Bond Indenture the legal contract that specifies the rights and obligations of the bond issuer and the bond holders Bearer Bonds bonds with coupons attached to the bond The holder presents the coupons to the issuer for payments of interest when they come due Term Bonds Bonds in which the entire issue matures on a single date Serial Bonds bonds that mature on a series of dates with a portion of the issue paid off on each Mortgage Bonds bonds issued to finance specific projects which are pledged as collateral for the bond issuer Debentures bonds backed solely by the general credit worthiness of the issuing firm unsecured by specific assets or collateral Subordinated Debentures bonds that are unsecured and are junior in their rights to mortgage bonds and regular debentures Convertible Bonds bonds that may be exchanged for another security of the issuing firm at the discretion of the bond holder Stock Warrants bonds issued with stock warrants attached giving the bond holder an opportunity to purchase common stock at a specified price up to a specific date Call Provision a provision on a bond issue that allows the issuer to force the bond holder to sell the bond back to the issuer at a price above the par value Call premium the difference between the call price and the face value on a bond Sinking fund provision a requirement that the issuer retire a certain amount of the bond issue each year Junk Bond bond rated as speculative or less that investment grade by bond rating agencies Sovereign Bonds government issued foreign currency denominated debt Chapter 7 Mortgage Markets Mortgages Loan to individuals or businesses to purchase a home land or other real property Securitized Securities packages and sold as assets backing a publicly traded or


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