Fabozzi 2 Flashcards

market mutual funds
Terms Definitions
What are captions?
options on caps
what five financial innovation categories does the Bank for International Settlements classify?
1. price-risk transfering innovations2. credit-risk transfering instruments3. liquidity-generating innovations4. credit-generating instruments5. equity-generating instruments
What is commercial paper?
short-term unsecured promissory note in the open market; for large corporations with strong credit ratings; bridge financing- issue them until market is favorable for long-term debt; maturity is less than 270 days; most common 30-50 days or less; don't have to register with SEC if less than 270 days; held mostly by money market mutual funds and institutional investors; very little secondary trading
What is pure expectations theory?
forward rates exclusively represent expected future rates
What are crossing networks?
allow institutional investors to cross trades- match buyers and sellers directly- typically via computer; excecute aggregate orders; lower trading costs; anonymity
What is the agency problem?
managers in it for themselves
What is tax-backed debt?
debt backed by issuer's ability to level taxes
general obligation debt-
unlimited- secured by issuer's unlimited taxing power
limited- statutory limit on how much issuer can tax to service the debt
What are senior bank loans?
another name for syndicated bank loans; have a priority position over bondholders with respect to repayment of interest and principal
What are cash settlement contracts?
futures contract in which settlement is made in cash only
What is cash flow?
the return that an investor will realize by holding a financial asset: dividends, coupon payments on bonds, stock price gains
what is call option?
owner has option to buy a financial asset
What are anomalies in the market?
patterns of pricing inefficiency over long periods of time
What are fallen angels?
a bond rated investment grade at the time of issuance but subsequently downgraded to noninvestment grade
What are conversion factors?
the factor that must be multiplied by the price of the futures contract to arrive at the invoice price for a particular deliverable Treasury bond or note
What are open market operations?
most powerful instrument; Fed can buy and sell, in open debt markets, government securities for its own account- US T-bonds or bills or obligations of federal agencies; mostly use t-bills
What is a call provision?
issuer can retire bond (fully or partially) before maturity; hurts holder because issuer can replace an old bond with a lower interest cost issue should interest rates in the market decline
What are commercial mortgage-backed securities?
private entities that do not have any implicit or explicit government guarantee
What are the 3 types of financial companies?
1. captive finance companies
2. bank-related finance companies
3. independent finance companies
What is the reference rate?
benchmark rate used in a swap or interest rate agreement
what 3 factors have led to the integration of financial markets?
1. deregulation or liberalization of markets; activities of market participants2. technological advances for monitoring world markets, executing orders, analyzing financial opportunities 3. increased institutionalization of financial markets
What are deferred interest bonds?
bonds sell at a deep discount and do not pay interest for an initial period, typically 3 to 7 years
What is reversibility or turnaround cost?
cost of investing in a financial asset and then getting out of it and back into cash again; determinants- bid-ask spread, commissions
What does the cash flow of credit card receivables consist of?
finance charges collected, fees and principal
What is a perfect or textbook hedge?
when the profit and loss on positions are equal
What are the 4 major types of markets on which sotck are traded?
1. first market- trading on exhcanges of listed exchange stocks
2. second market- trading in OTC market of stock not listed on an exchange
3. third market- trading in OTC market of stock listed on an exchange
4. fourth market- private transactions; no broker-dealer intermediary
What is the Financial Times Industrial Ordinary Index or FT 30?
LSE- based on prices of shares of 30 leading companies
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