BA 3303 - Finance - E1-a
Terms
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- Define Money.
- anything that is generally accepted as a means of payment
- Define Liquidity.
- ease w/ which an asset may be converted into money (w/out loss, depth of fin mkt.)
- Define M-1.
- sum of coins, currency, & demand deposits, traveler’s checks (in circulation)
- Define M-2.
- M1 + savings accounts, & small certificates of deposit (less than $100k)
- Yield Curve
-
graph relating int. rates & the term to maturity.
Y-axis = percent, X-axis = term
Negative slope = short-term rates exceed long-term rates – expect lower interest rates (returns)
Positive slope = Expecting Higher interest rates (returns) - IPO
- (Initial Public Offering) first sale of common stock to the general public
- SEC
- (Securities & Exchange Commission) govt. agency that enforces fed. securities laws.
- SIPC
- (Securities Investor Protection Corporation) fed agency that insures investors against failure by brokerage firms
- Investment banker
- middleman who brings together investors & firms (& governments) issuing new securities.
- Underwriting
- purchase of an issue of new securities for subsequent sale by investment bankers; the guaranteeing of the sale of a new issue of securities.
- Best efforts agreement
- contract w/ investment banker for sale of securities in which investment banker does not guarantee sale but does agree to make best effort to sell the securities.
- Private placement
- nonpublic sale of securities to a financial institution
- Specialist
- market maker on an organized exchange
- Spread
- difference between the bid & ask prices
- Money
- anything that is generally accepted as a means of payment.
- Liquidity
- ease w/ which an asset may be converted into money (w/out loss, depth of fin mkt.)
- Money supply
- total amount of money in circulation (traditional measure = M1; broad def = M2)
- M1
- sum of coins, currency, & demand deposits, traveler’s checks (in circulation)
- M2
- M1 + savings accounts, & small certificates of deposit (less than $100k)
- Term structure of interest rates
- relationship between yields (int. rates) & time to maturity (term) for debt w/ a given level of risk
- Neg slope =
- short-term rates exceed long-term rates – expect lower int rates (returns)
- Pos slope =
- Expecting Higher int rates (returns)
- Short-term =
- 1 year or less
- Long-term =
- more than a year
- Role of interest rates
- cost of credit (as a %), long-term &/or high risk = high interest rates
- Originating house
- investment banker who makes an agreement to sell a new issue & forms a syndicate to sell the securities.
- Syndicate
- selling group formed to market a new issue of securities
- Preliminary prospectus (red herring)
- initial doc detailing fin condition of a firm that must be filed w/ SEC to register new issue of securities.
- Registration
- process of filing info w/ SEC concerning a proposed sale of securities to general public
- Full disclosure laws
- fed. securities laws requiring timely disclosure of info that may affect value of a firm’s securities.
- 10-k report
- required annual report filed w/ the SEC by publicly held firms
- Round lot
- normal unit of trading in a security (usually 100 shares)
- Odd lot
- unit of trading that is less than a round lot
- Commission
- payment to broker for executing an investor’s buy/sell orders.
- Settlement date
- date by which payment for the purchase of securities must be made; date by which delivery of securities sold must be made
- Margin
- investor’s equity in a security position
- Financial leverage
- use of borrowed funds to magnify the % return on an investment
- Street name
- registration of securities in broker’s name instead of in the buyer’s name
- Long position
- purchase of securities in anticipation of a price increase
- Short position
- sale of borrowed securities in anticipation of a price decrease
- ADR's
- (American Depository Receipts) receipts issued for foreign securities held by a trustee (not foreign shares but receipts for stock)
- Eurobonds
- bonds sold in a foreign county but denominated in the currency of the issuing firm
- EMH
- (Efficient market hypothesis) theory that securities prices correctly measure current value of a firm’s future earnings & divs
- CD
- (Certificate of deposit) time deposit issued by a bank w/ a specified int rate & maturity
- Negotiable CD
- CD issued in amounts of $100K or more whose terms are individually negotiated between bank & saver & for which there exists a 2ndary mkt.
- Required reserves
- funds that banks must hold against deposit liabilities
- Excess reserves
- reserves held by a bank in excess of those it must hold to meet its reserve requirement
- Correspondent bank
- major bank w/ which a smaller bank has a relationship to facilitate check clearing & to serve as a depository for reserves
- Secondary reserves
- short-term securities, especially Treasury bills, held by banks to increase their liquidity
- Money market mutual fund
- investment company that invests solely in short-term money market instruments
- T-bill
- (U.S. Treasury bill) short-term debt instrument issued by the fed. govt.
- Commercial paper
- unsecured short-term promissory notes issued by the most creditworthy corporations
- Banker’s acceptance
- short-term promissory note guaranteed by a bank
- Tax anticipation note
- short-term govt. security secured by expected tax revenues
- Monetary policy
- mgt of money supply for purpose of maintaining stable prices, full employment, & economic growth.
- Board of governors
- controlling body of Fed Reserve, members appointed by Pres of U.S.
- District bank
- 1 of 12 banks that compose the Federal Reserve
- FOMC
- (Federal Open Market Committee) part of Fed. Res., establishes & executes monetary policy
- Federal funds market
- market in which banks borrow & lend excess reserves
- Federal funds rate
- interest rate charged by banks on overnight loans of reserves
- Discount rate
- interest rate charged banks for borrowing reserves from Fed. Res.
- Open market operations
- buying/selling of U.S. Treasury securities by the Fed. Res.
- Fiscal policy
- taxation, expenditures, & debt management by the federal govt.
- Deficit
- disbursements exceeding receipts
- Surplus
- receipts exceeding disbursements
- Inflation
- general increase in prices w/ special emphasis on increases in consumer prices
- Deflation
- general decline in prices
- Recession
- period (at least 6 mo) of increase unemployment & negative economic growth