73 Cards in this Set
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stock
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are securities that represent ownership in a firm that can be traded in financial markets
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a firm that goes public
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issues stock in exchange for cash to support its growth
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a privately owned firm must
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rely on retained earnings and debt financing to fiance its growth
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stocks are issued
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in the primary markets and then traded in the secondary market
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organized exchanges
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they have trading floors where brokers execute transaction on behalf of their clients
a firm must meet specific requirements
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over- the - counter markets
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market for thinly-traded securities
securities don't trade very often
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common stock
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although holders of common stock cant make decisions, they hold the right to vote in matters concerning the firm such as the election of the board of directors or the issuance of new shares
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preferred stock
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holders of preferred stock have no voting rights
they have a stated fixed annual dividend rate, which can be omitted if earning are insufficient
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secondary stock offerings are most likely to occur when
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the current price is high
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52 week price range
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as an indicator of the volatility of the price
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dividend
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is the money per share distributed over the last year
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dividend yield
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ratio of dividend per share to price per share
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price to earnings ratio
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which is interpreted as an indicator of value
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volume
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represents the number of shares traded the previous day
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closing price
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which could be accompanied by information regarding the net change in price
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price-earnings method
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relies on forecasts regarding future earnings
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dividend- discount model
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the price of a stock should be the present value of future dividends
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adjusted dividend
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need to forecast the future price same as dividend discount model
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free cash flow model
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used for firms that do not pay dividends
-estimate the cash flow that will result from operations
-subtract liabilities to obtain the value of the firm
-divide by the number of shares outstanding
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the limitation of the free cash flow model is
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the difficulty of making or obtaining accurate forecasts
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beta> 0
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the stock displays positive co-movement with the market
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beta > 1
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the stock is more volatile than the market
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stocks are expected to
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deliver a return above the risk free rate
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excess return
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the spread or gap between a stock return and the risk free rate
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to assess a stocks performance
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we usually look for measures of " excess return per unit of risk"
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commercial banks play
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an important role in channeling funds from surplus units to deficit units
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check able deposits
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accounts that allow the owner to write checks to third parities
-non-interest earning checking accounts
-interest earning negotiable orders of withdrawal accounts
-money-market deposit accounts
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non transaction deposits
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accounts from which the depositor cannot write checks
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borrowings
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funds from the federal reserve system, other banks, and corporations
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bank capital
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is the source of funds supplied by the bank owners
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reserves
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funds held in account with the fed
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securities
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us gov./agency debt, municipal debt, and other securities
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loans
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not very liquid
business
auto
mortages
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other assets
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bank buildings
computer systems
other equipment
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banks tend to
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borrow short and lend long
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banks engage in
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maturity transformation
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asset management
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refers to the attempt to earn the highest possible return on assets while minimizing the risk
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liquidity management
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managing the source of funds, from deposits, to cds, to other debt
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capital adequacy
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bank capital is a cushion that prevents bank failure
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what should a bank manager do if she feels the bank is holding too much capital
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-retire stock
-increase dividends to reduce retained earnings
-increase asset growth via debt
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during the recent financial crisis banks were forced to either
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raise new capital
reduce lending
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government safety net
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deposit insurance and the fdic
depositors will not flee the banking system at the first sight of trouble
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restrictions on asset holdings
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limit on the type of assets banks may hold
financial crisis can still occur
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capital requirements
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banks required to hold a certain level of bank capital
leverage ration exceeds 5%
capital must exceed 8% of the banks risk-weighted assets
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mutual funds
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pool the resources of many small investors by selling them shares and using the proceeds to buy securitites
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liquidity intermediation
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investors can quicly convert investments into cash
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denomination intermediation
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investors can participate in offerings that individually require more capital than they possess
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diversification
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investors immediately realize the benefits of diveresification even for small investments
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cost advantages
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the mutual fund can negotiate lower transaction fees than would be avilable to the individual investors
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managerial expertise
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many investors prefer to rely on professional money managers to select their investments
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closed-end funds
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a fixed number of nonredeemable shares are sold through an initial offering and are then traded in the otc markets
prices determined by supply and demand
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open-end funds
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investors may buy or redeem shares at any point where the price is determined by the net asset value of the fund
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4 primary classes of mutual funds available to investors
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stock funds
bond funds
hybrid funds
money market funds
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capital appreciation funds
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seek rapid increase in share price, not being concerned about dividends
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total return funds
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seek a balance of current income and capital appreciation
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strategic income funds
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invest primarily in us corporate bonds, seeking a high level of current income
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government funds
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invest in us treasury as well as state and local government bonds
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money market mutual funds
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-open end funds only invest in money market securities
-offer check-writing privieges
-net assets have grown dramatically in recent years
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index funds
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fund contains the stock of the index it is mimicking
-offer benefits of traditional mutual funds w/out the fees of the professional money managers
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hedge funds
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a special type of mutual fund that recieved considerable attention following the collaspe of the long term capital management
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mortgage
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is a form of secured debt with typical maturity between 15 and 30 years
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value of the property
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down payment + mortgage
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equity invested
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indicated how much skin in the game the borrower has
it is measured as the ratio of down payment to the value of the property
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income level
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allows to calculate the debt to income ratio and have an idea of how large the debt burden is
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credit history
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which is a record of the issuers reputation as a borrower
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adjustable rate mortgage
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the interest rate is tied to a benchmark rate
mortgage rate is expressed as a spread over the benchmark rate
interest rate tend to be lower
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graduated payment mortgage
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payments are small at the beginning then they increase gradually between the 5th ad 10th year and they level off afterwords
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growing equity mortgage
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same idea ad graduated payment with the difference that the payments do not level off
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second mortgage
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as payments are made the value of the property could be much higher than the balance on the mortgage
could borrow against the amount of equity
junior to first , tend to have higher interest rates and shorter maturities
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shared appreciation mortgages
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credit conditions for the issuer are more favorable
the issuer commits to share the appreciation in the value of the house with the originator if they sell the property
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balloon payment mortgages
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structure of payments involve payments based on 3 year mortgage for the first three to five years and a complete payment at maturity
refinance debt
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mortgage backed securities
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originators can issue securities which payments are backed by the cash flows generated by the mortgages
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collateralized mortgage obligations
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pool of mortgages is divided into different tranches or classes that differ in their maturity
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FIN 310: Final