Term
| where do financial assets come from? |
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Definition
Financial Markets:
-Primary markets.. NEW selling of stock
-Secondary markets.. trading b/w existing assets |
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Term
| How do Financial Assets relate to Real Assets? |
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Definition
| Fin Assets are claims to future income generated by Real Assets. |
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Term
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Definition
| A tradeable asset of any kind; in small, fungible units, equivilent, interchangable, and substitutible. |
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Term
What is the difference between Primary Markets and Secondary Markets? Provide
examples. |
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Definition
Primary Mkts are issues of NEW stocks/bonds
Secondary Mkts are trading of already-issued securities. Transfer of ownership |
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Term
| What does underwriting mean? |
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Definition
| securities underwriting is the process of investment banks raising capital for investment companies investing $$ into corporations on behalf of individuals |
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Term
| What are the major classes of financial securities? |
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Definition
3 of them:
1) Debt securities: promise to pay pre-determined amnt. and some pre-determined maturity date.
2)Equity securities: ownership share in a corp. ex. stocks, NO pre-determined cash flow
3)Derivative securities: fin. side bets on future price of a stock w/out actually having to have ownership in that company. ex: forwards/futures, swaps, options, etc. |
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Term
| What does (corporate) default mean? What happens when a corporation defaults? |
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Definition
| Not being able to make payments on a corporations debt. During default, debt holders (creditors first) can seize assets of firm as compensation. |
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Term
| What does dividend mean? What does Retained Earnings mean? |
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Definition
| Payment to shareholders proportional to # shares owned by each. Not all profits are immediately distributed. Retained Earnings are the earnings that the company keeps to re-invest in new real assets in the future. |
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Term
What are stock splits? What happens to the share price when a corporation splits
its stock? |
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Definition
| when the total number of shares is increased to push down the price per share. Shareholders recieve addt'l shares proportional to size of the split. Price is divided by the new split ratio. |
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Term
| How can shareholders be happy even when a stock does not pay dividends? |
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Definition
| Share price increases, positive future company outlook, rising expectations, and knowing the potential dividend $$ is being used to re-invest in the company and improve it. |
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Term
| What does market capitalization mean? |
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Definition
| Total value of an issued derivative or stock pool. Equal to share price x number of shares out. |
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Term
What is the role of the Board of Directors of a corporation? Who chooses the
Board of Directors? |
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Definition
| They manage the corp. and are voted in by the shareholders, based on each holders' stake in the company. |
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Term
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Definition
| Where investors who hold shares via investment companies don't attend meetings and empower the corp. to vote for them. |
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Term
What is the agency problem created by the separation of ownership and
management in corporations? |
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Definition
| The board doesnt necessarily work in the best interest of the shareholders.. management can make decisions w/out the board's approval. |
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Term
| What are Derivatives? How do Corporations use derivatives? |
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Definition
| Contracts that rep. purely financial side bets b/w 2 parties.. bets on future CF's of companies and future prices as well. |
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Term
On average, how much ($ amount) of new shares of stock are issued each year in
the US? How much of new corporate bonds? |
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Definition
| Primary Mkts: $200B of new shares issued each yr, $900B/yr in bonds. |
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Term
How much would it cost to buy all the publicly traded shares of US stocks (i.e.,
what is the total market capitalization of US publicly traded corporations)? How
would it cost to buy all publicly traded US Fixed Income securities? |
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Definition
| $17.3 Trillion to buy all equity in US. $36.3 Trillion to buy all debt. |
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Term
| What does “trading volume in Secondary Markets” mean? |
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Definition
| How much money is traded for stocks in secondary mkts each day.. about $90B/day for equity, $800B/day for debt |
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Term
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Definition
| Total trading volume in the period ($) divided by avg outstanding dollar amt in the period ($). 130% yearly turnover in US |
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Term
| How does one buy freshly issued US Fixed Income Securities or US stocks? |
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Definition
| through a broker or other financial intermediary. |
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Term
How does one buy previously issued US Fixed Income Securities? What are the
venues an institution can use to buy previously issued US stocks? |
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Definition
| On any secondary exchange during trading hours for stocks. One can use an investment company to buy prev. issued US fixed income securities |
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Term
| What is an “Over-the-Counter” market? |
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Definition
| Done directly b/w 2 parties w/out supervision of an exchange. facilitates liquidity, mitigates credit risk, maintain current mkt price, trade stocks and derivatives, not debt. |
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Term
| What is NASDAQ and how does it differ (or not) from the NYSE? |
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Definition
Venue for trading US stocks, stocks in NYSE have firms w/ larger market cap.
Listing req's for firms: fee, min. mkt cap, addt'l rules. |
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Term
| What is an ECN? Provide examples of ECNs |
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Definition
| Electronic Communication Network. Facilitates trading outside of stock exchanges. ex: NYSE arca, BATS |
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Term
| What is the difference between a broker and a dealer? |
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Definition
| Brokers charge a fee to help clients find buyers/dealers that will accomodate them. Dealers trade with clients DIRECTLY |
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Term
| What is a bid-ask spread? |
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Definition
| the diff. b/w the bid(buy) price and the ask(sell) price.. Ask > Bid |
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Term
| What is an electronic limit order book? |
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Definition
| list of orders for a particular stock from individuals. Can't see who sells and buys what, unless you pay more $$ to agency running the electronic limit order book. |
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Term
| What is the difference between market orders and limit orders? |
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Definition
| market order will do order at current mkt price. Limit order is a conditional order to be executed at a specified (max) price. |
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Term
| What are trading costs? Provide examples. |
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Definition
| Include explicit commissions as well as the bid-ask spread. |
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Term
| Why does it make sense for some individuals to invest in financial securities rather than investing on the businesses they run? |
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Definition
| Because it is best to keep a well-diversified portfolio of different types of companies, rather than throwing all of your eggs in one basket. |
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Term
| Why are secondary markets important? |
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Definition
| because people are always trying to sell and buy their existing stocks; if not, there would be no need for stock prices, or the fluctuations in them. |
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Term
| Why do Corporations hire Investment Banks in order to issue new securities? |
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Definition
Because it's more cost effective for a few IB's to handle security issuances rather than 1000s of corps doing it on their own because of costs like:
-lawyers w/ securities knowledge
-financial analyst team
-Salespeople team |
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Term
| Why do Investment Banks have an incentive to accurately price new securities? |
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Definition
| Because their whole business depends on having the reputation of being able to accurately price new securities; if not, someone else will take their business. |
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Term
| What is “book-building” in the context of underwriting? |
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Definition
| Investors communicate their interest in purchasing shares of an IPO to underwriters. The process of POLLING potential investors is book-building. |
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Term
| What is a “prospectus” in the context of underwriting? |
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Definition
| A statement that says a company will not attempt to sell securities before registration approval from the SEC |
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Term
What is the difference between “private placement” and “public offering” in the
context of underwriting? |
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Definition
Private Placement: sell shares to an exclusive, small group of wealthy investors rather than having shares in the pub. mkts. Cheaper than public offerings
Public Offerings: Generate interest among potential outside investors and provides information about the offering. This is where book-building comes in. |
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Term
| What is the Security Exchange Commission (SEC)? |
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Definition
| A government agency to enforce the full disclosure of relevant info relating to the issue of new securities, created in SEC act of 1933/34 |
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Term
| What is an IPO? What is a SEO? |
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Definition
Initial Public Offering- 7% fees which are more expensive because they're riskier
SEO: Seasoned Equity Offering- 2% fees |
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Term
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Definition
| A mutual fund in which shares are sold without a commission or sales charge. The reason for this is that the shares are distributed directly by the investment company, instead of going through a secondary party. |
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Term
| What is the main reason why underwriting fees on IPOs larger than fees on SEOs? |
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Definition
| because IPO's are riskier |
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Term
| What is the economic role of Investment Management companies? |
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Definition
| They're firms that manage individuals portfolios for an annual fee ranging from .2 to 1.5% of assets. |
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Term
| What is the difference between Active Management and Passive Management? |
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Definition
Active Management: portfolios actively managed by indiv. manager, or multiple managers. Have higher fees..
Passive Management portfolios mirror the components of a mkt index; MUCH lower fees.. |
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Term
What are the differences between an Exchange Traded Fund and a (Open-End)
Mutual Fund? |
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Definition
An ETF can be traded throughout the day, there are tax advantages, has broker fees, but lower mgt fees.
Open End Mutual Fund is dominant platform, anyone can invest, no broker fees, but can only trade at the END of the trading day. |
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Term
| What are the differences between a Hedge Fund and a Mutual Fund? |
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Definition
| Mutual Funds have much more disclosure requirements than Hedge Funds do, and typically charge lower fees than Hedge Funds do, plus no "incentive fees". |
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Term
| What is a MBS? What is an ABS? |
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Definition
These are the outcome of turning a fin. asset from a non-security to a security
Mortgage Backed Securities: loans which a securitized on Residential Homes (RMBS) or Commercial Buildings (CMBS) |
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Term
| What is an American Depositary Receipt (ADR)? |
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Definition
| A security representing securities of a non-US company that trade in the US financial mkts. Denominated, pay dividends ($), and can be bought and sold like reg. shares of stock. |
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Term
| What is a Commercial Paper? |
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Definition
| An unsecured promissory note w/ a fixed maturity of 1 to 15 days. not backed by collateral, so only firms with supreme credit ratings from the agencys can do this (to get money to meet short term debt obligations). |
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Term
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Definition
| No connection to euro currency; they are money deposits denominated in US dollars at banks outside of US, so not under jurisdiction of the Fed Reserve, which allows for higher margins for the banks. a US dollar denom. deposit in Tokyo/Beijing is a eurodollar deposit. |
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Term
| What are repurchase agreements? |
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Definition
| the sale of securities together with an agreement for the seller to buy back the securities at a later date. The repurchase price should be greater than the original sale price, the difference effectively representing interest. orig. seller is the borrower and the buyer is the lender. |
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Term
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Definition
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Term
| What is a market order and how does it differ from a limit order? |
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Definition
a market order is a buy or sell order to be executed immediately at current mkt prices.(provide # shs)
A limit order is an order to buy at no more than a specific price given with the # of shs in the order. controlling price > certainty of execution (opposite for mkt order) |
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Term
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Definition
| Annual marketing or distribution fees on a mutual fund. Considered operational expense, .25-1% of net assets. |
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Term
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Definition
| Real Estate Investment Trust: sells like a stock and invests in real estate directly, either thru properties (Equity REITS) or mortgages (Mortgage REITS) |
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Term
| What is Net Asset Value (NAV)? |
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Definition
| A mutual fund or ETF's price per share; divide tot. val of all securities of portfolio less any liabilities by # of fund shares outstanding. |
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