Study Guide: Exam 3
31 Cards in this Set
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Initial public offering
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Stock issued from firms initially going public, allowing for public trading on stock markets for the first time
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Primary markets
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Used by corporations and gov'ts
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Bonds, stocks
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Types of primary market trades
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Secondary markets benefits who?
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Investors and issuers
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Secondary markets provide what for investors?
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Investors: liquidity
Issuers: diversifications benefits
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Money markets
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One year or less
treasury bills
federal funds and repurchase agreements
commercial paper
negotiable certificates of deposit
banker's acceptances
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Capital markets
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Trade stocks and debt with maturities greater than one year
U.S. gov't agency bonds
mortgages and mortgage-backed securities
corporate bonds
corporate stocks
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Foreign exchange market risk
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Subject to foreign exchange risk due to currency fluctuations
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Liquidity definition
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Ease with which an asset can be concerted into cash
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How do markets provide liquidity?
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By allowing fund suppliers to trade financial securities among themselves
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Types of risk for investores
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Price risk
liquidity risk
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Price risk
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Fund suppliers may not get their principal back, let alone any return on their investment
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Liquidity risk
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If security is illiquid, investors add a liquidity risk premium
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Inflation definition
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Continual increase in the price level of a basket of goods and services (higher the inflation, the more expensive the same basket of goods will be in the future)
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Term structure of interest rates
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Cbond definitionomparison of market yields on securities: assumes all characteristics except maturity are the same
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Bond definition
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Debt obligation securities issued to fund various projects or opertaions
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Who issues bonds?
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Federal gov't, its agencies, state and local gov't
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Par value (principle)
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Amount of the loan to be repaid: common $1,000
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Time to maturity
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Number of years left until the maturity date: common 1-30 years
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Call
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Issuer can repay the principal before the maturity day
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Why call bonds?
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Usually b/c interest rates have fallen or issuer's circumstances have changed
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Coupon rate
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Interest rate used to compute the bond's interest payment each year: common 2-10%
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Why do firms like callable bonds
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Call premium increases the par value fo the bond
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Zero coupon bonds
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Do not make interest payments. the bond pays only the par value payment at its maturity date
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Example of a zero coupon bond
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Savings bond
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Advantage of zero coupon bond
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Sell at a large discount to par value
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Common stock
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Ownership interest in a corporation
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Value of common stock
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Potential current income from dividends and capital appreciation in stock price increase
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Rights for common stock
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Rights to all cash flows after other liabilities have been satisfies: residual claimants
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NY stock market
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On floor b/w specialist
"big Board"
2,000+ firms trade here
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NASDAQ
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Second largest
electronic
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Study Guide: Exam 3