Finance test

gcannon007's version from 2016-10-26 00:01

Section 1

Question Answer
financial marketVenue that brings together suppliers and users of funds.
needs of investorsReturn, Risk, Term
returnWhat kind of money will this investment offer?
riskWhat are the chances that the investor will not earn the expected returns?
termFor how long will you invest the money or for how long do you need the money
market efficiency the degree to which stock prices and other securities prices reflect all available, relevant information
barriers to market efficiencyRegulations, Taxation of the sale/returns of investments,Transaction costs of transfers of capital, Inaccurate/Insufficient information
role of investment bankersfacilitates issuance of new securities for its client by underwriting the issue
financial intermediariesobtains funds from investor in exchange for securities (loans, bonds, etc)
direct transferstransaction directly between buyer and seller of a security
types of financial marketsphysical asset, spot, money, primary, and private markets
primary marketsmarkets in which corporations raise new capital
secondary marketsmarkets in which existing, already outstanding securities are traded among investors
IPOscompany issues stock in the public market for the first time
going publicenables a company’s owners to raise capital from a wide variety of outside investors
equityStock or Shares in a company (represents ownership)
debtBonds (a securitized loan; loan can now be traded on public exchanges)
derivativeInstrument that trades rights or obligations based on another “underlying” asset without actually trading the asset
risk management toolway derivative can be used to hedge or reduce risk
speculationway derivative can be used to bet on the future direction of the stock
securitypayments on individual loans
commercial banksa bank that offers services to the general public and to companies.
investment banksa bank that purchases large holdings of newly issued shares and resells them to investors
credit unionsnonprofit-making money cooperative whose members can borrow from pooled deposits at low interest rates
mutual funds investment program funded by shareholders that trades in diversified holdings and is professionally managed
exchange traded fundstype of investment fund that is traded on a stock exchange
hedge funds limited partnership of investors that uses high risk methods, such as investing with borrowed money, in hopes of realizing large capital gains
market proxiesbroad representation of the overall market.

Section 2

Question Answer
bondLong-term debt instrument in which borrower agrees to pay bondholders
value of the bond changes with inc/dec in market yieldsInverse relationship
Tresury bondIssued by federal government
agency bongissued by federal agency
muicipal bondIssued by a municipality
reinvestment rate riskthe concern that rd will fall, and future CFs will have to be reinvested at lower rates, hence reducing income
interest rate/price riskThe concern that rising yields in the market rd will cause the value of a bond to fall
when refund rate declineswhen issuers call bonds
downgradingLower rating requires higher return. Which lowers bond value

Section 3

Question Answer
stand-alone riskIf you only had 1 investment
portfolio riskIf you had multiple investments
risk aversioninvestors dislike risk and require higher rates of return to encourage them to hold riskier securities
risk premiumdifference between return on risky asset and riskless asset
risk return trade offincentive to an investor to take on more risk is the potential for higher returns.

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