EC355 Ch 3, 4, 5, 6, 7 review

Ch 3: Financial Instruments, Financial Markets, Financial Institutions

100

Shares in the returns or payments arising from a specific asset or pool of assets, such as home mortgages or student loans. 

ASSET-BACKED SECURITIES

200

Asset pledged to pay for a loan in the event that borrower doesn't make the required payments. 

COLLATERAL

300

A financial instrument, such as a futures contract or an option, whose value and payoff are depend on the behavior of underlying instruments. 

DERIVATIVE INSTRUMENT

400

A financial market in which a borrower obtains funds from a lender by selling newly issued securities.

PRIMARY FINANCIAL MARKET 

of PRIMARY MARKET

500

A marketable security that tracks a basket of assets like an index fund. 

EXCHANGE-TRADED FUND (ETF)

Ch 4: Future Value, Present Value, and Interest Rates

100

1/100 of a % point

BASIS POINT

200

The interest  you get on interest as it accumulates over time. 

COMPOUND INTEREST

300

Compute the future value of $100 at an 8 percent interest rate 5 years from now. 

$146.93

400

You decide you would like to retire when you turn 65, and live on $50,000 per year; then you expect to live until you are 85. Assuming the interest rate is 7%, how much do you have to have saved when you retire to reach this goal. 

$529,700.71

500

Assuming that the current interest rate is 3 percent, compute the present value of a five-year, 5 percent coupon bond with a face value of $1,000.

$1,091.59

Ch 5: Understanding Risk

100

Splitting wealth among a variety of assets to reduce risk. 

DIVERSIFICATION

200

Square root of the variance measure of risk; measures the dispersion of possible outcomes. 

STANDARD DEVIATION

300

A risk affecting only a small number of people (a specific firm, or industry.

IDIOSYNCRATIC RISK

400

The performance of a group of experienced investment advisers or financial managers. 

BENCHMARK

500

Borrowing to finance part of an investment. Increases expected return and risk. 

LEVERAGE

Ch 6: Bonds, Bond Prices, and Determination of Interest Rates

100

The amount an investor receives in return for an investment. 

PAYOFF

200

Reducing the overall risk by investing in two assets with opposing payoffs. 

HEDGING

300

The worst possible loss over a specific time horizon at a given probability; a measure of risk. 

VaR or VALUE AT RISK

400

Your financial adviser recommends buying a 10-year bond with a face value of $1,000 and an annual coupon of $80. The current interest rate is 7 percent. What might you expect to pay for the bond (aside from brokerage fees)?

$1,070.24

500

The return from purchasing and selling a bond (applies to bonds sold before, or at maturity). 

HOLDING PERIOD RETURN

Ch 7: The Risk and Term Structure of Interest Rates

100

Short-term, privately issued zero-coupon debt that is low risk and very liquid and usually has a maturity of less than 270 days. 

COMMERCIAL PAPER

200

An increase in the demand for low-risk government bonds, coupled with a decrease in the demand for virtually every risky investment. 

FLIGHT TO QUALITY (SAFETY)

300

A bond with a high risk of default. Also called a high-yield bond.

JUNK BOND

400

Bonds issued by state and local governments to finance public projects; the coupon payments are exempt from federal and state income taxes. Also called tax-exempt bonds.

MUNICIPAL BONDS

500

The gap between yields to maturity on a long-term and short-term bonds (usually free of default-risk). 

TERM SPREAD