Fin304 Mid-Term

Financial assets Securities (ex.: bonds, stocks) claim on real assets.

Real assets Assets used to produce goods and services. (ex.: lands, building, machines)
Fixed-income securities Pay a specified cash flow over a specific period.
Money market Include short-term, high liquid and relatively low-risk debt instruments.
(ex.: T-bills)
Capital market Include long-term, high yield, high-risk. (ex.: Treasury securities)
Equity An ownership share in corporation.
Derivative securities Securities providing pay-offs that depend on the values of other
assets.
Agency problem Conflict of interest between managers and stockholders:
o First, compensation plans tie the income of managers to the success of the firm.
o Second, board of directors force out management teams that are underperformance.
o Third, outsiders such as security analysts and large investors such as pension funds
monitor the firm and make the life of poor performance uncomfortable.
Assets allocation Allocation of an investment portfolio across broad assets classes.
Security selection Choice of specific securities within each asset class.
Security analysis Analysis of the value of securities.
Diversification Spreading investments around in to many types of investments to
reduce risk.
Passive management Buying and holding a diversified portfolio without attempting to
identify mispriced securities.
Active management Attempting to identify mispriced securities or to forecast broad
market trends.
Mutual funds A professionally manage firm of collective investments that pool money
from investors and invest it in stock, bonds and short-term money market investments.
Financial intermediaries Institution that connect borrowers and lenders by accepting
funds from lenders and loaning funds to borrowers.
o First, by pooling the resources of money small investors, they are able to lend
considerable sum to large borrowers.
o Second, by lending too many borrowers, intermediaries achieve significant
diversification, so they accept loans that individually might be too risky.
o Third, intermediaries can use economies of scale and economies of scope.
Economies of scale Increase in the scale of the firm causes a decrease in the
long-run average cost of the each unit due to increasing or decreasing the
scale of production
Economies of scope Efficiencies associated with increasing or decreasing
the scope of marketing and distribution.
Investment banking Firms specializing in the sale of new securities to the public,
typically by underwriting the issue.
Primary market A market in which new issued of securities are offered to the public.
Secondary market Already existing securities are traded among investors.

Globalization Tendency toward a worldwide investment environment, and the

integration of national capital markets.
Pass-through securities Pools of loans (such as home mortgage loans) sold in one
package. Owners of pass-through receive all of the principal and interest payments made
by the borrowers.
o Securitization Pooling loans in to standardized securities backed by those loans,
which can then be traded like any other security.
1- The bank that originated the mortgages continue to service them, but no
longer own the mortgage investment; the investment has been passed through
to the GNMA security holders.
2- Availability of funds to homebuyers no longer depends on local credit
condition and is no longer subject to local banks potential monopoly powers.
3- Securitization also expands the menu of choices for the investor.
Treasury bills Short-term government securities issued at a discount from face value
and returning the face amount at maturity.
Bid price The price at which a dealer or other trader is willing to purchase a security.
(BUY)
Ask price The price at which a dealer or other trader is willing to sell a security.
(SELL)
Bid-ask spread The difference between a dealer s bid and ask price.
Certificate of deposit A bank time deposit.
Commercial paper Short-term unsecured debt issued by large corporations.
Eurodollars Dollar-denominated deposits at foreign banks of branches of American
banks. In over words Eurodollar is dollar ($) outside of U.S. (home currency) (ex.: Eurolei
is Moldova lei outside of country)
Repurchase agreement Short-term sales government securities with an agreement to
repurchase the securities at a higher price.
Federal funds Funds in the accounts of commercial banks at the Federal Reserve Bank.
LIBOR Lending rate among banks in the London market.
Treasury notes and bonds Debt obligations of the federal government with original
maturities of one year or more.
Eurobond A bond denominated in a currency other than that of the country in which it
is issued. (ex.: dollar-denominated bond sold in Britan, will called Eurodollarbond)
Municipal bonds Tax-exempt bonds issued by state and local governments.
Corporate bonds Long-term debt issued by private corporations typically paying
semiannually coupons and returning the face value of the bond at maturity.
Mortgage-backed security Either an ownership claim in a pool of mortgages or an
obligation that is secured by such a pool.
Common stock Ownership shares in a publicly held corporation. Shareholders have
voting rights and may receive dividends.
Preferred stock Nonvoting shares in a corporation, usually paying a fixed stream
dividend.

Initial public offering First sale of stock by a formerly private company.

Underwriters They purchase securities from the issuing company and resell them.
Types of markets
o Direct search market It is least organized market. Buyers and sellers must seek
each other out directly. (ex.: the sale of a used refrigerator)
o Brokered market It is market where trading in a good is active, brokers find it
profitable to offer search services to buyers and sellers. (ex.: real estate market, stock
market)
o Dealer market A market in which traders specializing in particular assets buy and
sell from their own accounts. (ex.: car dealers)
o Auction market A market where all traders meet at one place to buy or sell an asset.
(ex.: Cristis auction)
Types of orders
o Market orders Buy or sell orders that are to be executed immediately at current
market price.
o Limit orders An order specifying a price at which an investor is willing to buy or
sell a security.
Trading mechanisms
o Dealer markets
NASDAQ National Association of Securities Dealers Automatic Quotations
System. (OCT over the counter market)
o Electronic communication networks Computer networks that allow direct trading
without the need for market makers.
o Specialist market A specialist role as a brokers is simply to execute the orders of
other brokers Specialist also may buy or sell shares of stock for their own portfolios.
Fair and orderly market. Maintain market by buying and selling shares from
inventory. (ex.: NYSE New York Stock Exchange)
Stock exchange Secondary market where already issued securities are bought and sold
by members.
Margin Describes securities purchased with money borrowed in part from broker. The
margin is the net worth of the investors account.
o Margin = Equity in account / Value of stock
Short sale The sale of shares not owned by the investor but borrowed through a broker
and later purchased to replace the loan.