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1. Alternative asset class- also known as nontraditional asset class. This includes real
estate, commodities, private equities, hedge
funds, currencies and all other asset classes
except common stocks, bonds, and cash
equivalents.
2. Asset- is any possession that has value in an
exchange. Assets can be classified as
tangible or intangible.
3. Asset class- a group of securities that
exhibit similar characteristics, behave
similarly in the marketplace, and are subject
to the same laws and regulations. The four
(4) major asset classes are common stocks,
bonds, cash equivalents, and real estate.
4. Bid-ask spread- the difference between the
price at which the market maker is willing to
sell a financial asset (i.e., the price it is
asking) and the price at which a market
maker is willing to buy the financial asset
(i.e., the price it is bidding).
5. Capital market- a financial market for
longer maturity financial assets.
6. Cash flow- is simply the cash that is
expected to be received each period from
investing in a particular financial asset.
7. Common stock market- the sector of the
stock market that does not include preferred
stock.
8. Credit risk (or default risk)- is the risk that
the issuer or borrower will default on the
obligation.
9. Debt instrument- the claims of the holder
of a financial asset in a fixed dollar amount
or a varying, or residual, amount.
10. Debt market- the financial market in which
debt instruments are traded.
11. Demand instruments- instruments for
which the creditor can ask for repayment at
any time, such as checking accounts and
many savings account.
12. Derivative instruments- derive their value
from the price of the underlying financial
capital
toward
3.
they provide an opportunity for people to
increase their savings by investing in them -functions 1 and 5;
4.
they reveal investors judgments about the
potential earning capacity of corporations, thus
a.
General Motors Acceptance Corporation
issues a financial instrument with four months to
maturity.
b.
The U.S. Treasury issues a security with 10
years to maturity.
c.
Microsoft Corporation issues common
stock.
d.
The State of Alaska issues a financial
instrument with eight months to maturity.
a.
b.
c.
d.
State of Alaska security trades in the money
market.
10. A U.S. investor who purchases the bonds
issued by the government ofFrance made the
following comment: Assuming that the French
government does not default, I know what the
cash flow of the bond will be. Explain why you
agree or disagree with this statement.
One would tend to disagree with this statement.
Even though there is no default risk with French
bonds issued by the government, some other risks
include price risk and foreign exchange risk.
11. A U.S. investor who purchases the bonds
issued by the U.S. government made the
following statement: By buying this debt
instrument I am not exposed to default risk or
purchasing power risk. Explain why you agree
or disagree with this statement.
This is not true. There is no default (credit) risk
of U.S. government securities. However, it is not
free of purchasing power or inflation risk. There is
also price risk, which is related to maturity of any
bond.
12. In January 1992, Atlantic Richfield
Corporation, a U.S.-based corporation, issued
$250 million of bonds in the United States. From