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Universities » University of Arizona (UA) » FIN - FINANCE » 421 - Investments » Flash Cards

exam1 - Flashcards

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Class:FIN 421 - Investments
Subject:FINANCE
University:University of Arizona
Term:Fall 2010
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real v financial assets produce goods and services v claims on real assets
Oxley Act tightened corporate governance
investment process 1asset allocation 2 security selection 3 security analysis
active management find mispriced securities time the market
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globalization trends ADRs WEBs ETFs international mutual funds
securitization trends mortgage pass-through securities other pass-through arrangements
Red herring v prospectus red herring = filing on new issues of securities prospectus = broschure-ish thing to potential investors
private placement Private placement (or non-public offering) is a funding round of securities which are sold without an initial public offering, usually to a small number of chosen private investors.
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security trading types direct search = least organized brokered= active trading dealer = increase trading in particular asset or asset type auction = most organized
bid price A bid price is the highest price that a buyer (i.e., bidder) is willing to pay for a good.
ask price Ask price, also called offer price, offer, asking price, or simply ask, is a price a seller of a good is willing to accept for that particular good.
stop order An order in a market such as a stock market, bond market, commodity market or financial derivative market is an instruction from a customer to a broker to buy or sell on the exchange.
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market specialist someone who is responsible for covering any non-filled buy/sell order for an asset
Electronic Communication Networks a type of computer system that facilitates trading of financial products outside of stock exchanges. The primary products that are traded on ECNs are stocks and currencies
Automated Bond System electronic system on the NYSE that records bids and offers for inactively traded bonds until they are canceled or executed
spread ask - bid
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stock margin have to put up own funds for at least 50% of stock (rather than 50+% borrowed
short sale profit from decline in price of a security 1 borrow stock 2 sell stock high 3 buy back stock after lower 4 return stock
% margin questions Percentage margin = Equity/Value of stock owed.
net asset value Net asset value (NAV) is a term used to describe the value of an entity's assets the value of its liabilities. (MV of assets) - liabilities / shares outstanding
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net asset value Net asset value (NAV) is a term used to describe the value of an entity's assets the value of its liabilities.
unit trust A unit trust is a form of collective investment constituted under a trust deed.
open-end investment An open-end fund is equitably divided into shares which vary in price in direct proportion to the variation in value of the fund's net asset value. Each time money is invested, new shares or units are created to match the prevailing share price; each time shares are redeemed, the assets sold match the prevailing share price
closed-end investment A closed-end fund issues a limited number of shares (or units) in an initial public offering (or IPO). The shares are then traded on an exchange or directly through the fund manager to create a secondary market subject to market forces. If demand for the shares is high, they may trade at a premium to net asset value. If demand is low they may trade at a discount to net asset value
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front-end load a fee paid when shares are purchased. this fee typically goes to the brokers that sell the fund's shares. Front-end loads reduce the amount of your investment
back-end load a fee paid when shares are sold. This fee typically goes to the brokers that sell the fund's shares
fees + funds return example Initial NAV = $20 Income distributions of $.15 Capital gain distributions of $.05 Ending NAV = $20.10
exchange traded funds An exchange-traded fund (ETF) is an investment fund portfolio traded on stock exchanges, much like stocks.
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holding period return In finance, holding period return (HPR) is the total return on an asset or portfolio over the period during which it was held. HPR = (End-Of-Period Value) + (interim cash flow) - (Initial Value)) /(Initial Value)
Expected returns sum of probs x HPRs
VAR(HPR) sum of probs x (HPRs - expected HPR)^2
SD(HPR) sqrt(Varhpr)
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arithmetic mean average of past returns
geometric mean average found by: nth root of (1 + past HPRs all multiplied together) and then - 1
variance of historical returns sum of (HPR - AMR)^2 / T-1
nominal interest rate growth of your money
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real interest rate growth of your purchasing power (nominal - inflation)
Fisher Equation R = rr + i + (rrxi)
Real after-tax rate ATrr = R(1-t) - i
kurtosis thinner distribution
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Terminal Value TV = I x e^rt i = investment r = rate t = time in periods
coupon rate The coupon or coupon rate of a bond is the amount of interest paid per year expressed as a percentage of the face value of the bond.
floater Floating rate notes (FRNs) are bonds that have a variable coupon, equal to a money market reference rate, like LIBOR or federal funds rate, plus a spread
call provision A call option, often it is simply labeled a "call", is a financial contract between two parties, the buyer and the seller of this type of option.
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put option A put option (usually just called a "put") is a financial contract between two parties, the writer (seller) and the buyer of the option.
convertible option type of bond that the holder can convert into shares of common stock in the issuing company or cash of equal value, at an agreed-upon price
BOND PRICING P = sum( (coupon or interest payments)/(1+semi-annual YTM or disc rate)^t + Par value / (1 + semi-annual ''')^T
prices and yields inverted relationship yield as in required rate of return yield -> 0, value -> sum of cash flow
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Realized Yield (TV / I)^(1/T) - 1
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 real v financial assetsproduce goods and services

v

claims on real assets
 Oxley Acttightened corporate governance
 investment process1asset allocation

2 security selection

3 security analysis
 active managementfind mispriced securities

time the market
 globalization trendsADRs
WEBs
ETFs
international mutual funds
 securitization trendsmortgage pass-through securities
other pass-through arrangements
 Red herring v prospectusred herring = filing on new issues of securities

prospectus = broschure-ish thing to potential investors
 private placementPrivate placement (or non-public offering) is a funding round of securities which are sold without an initial public offering, usually to a small number of chosen private investors.
 security trading typesdirect search = least organized

brokered= active trading

dealer = increase trading in particular asset or asset type

auction = most organized
 bid priceA bid price is the highest price that a buyer (i.e., bidder) is willing to pay for a good.
 ask priceAsk price, also called offer price, offer, asking price, or simply ask, is a price a seller of a good is willing to accept for that particular good.
 stop orderAn order in a market such as a stock market, bond market, commodity market or financial derivative market is an instruction from a customer to a broker to buy or sell on the exchange.
 market specialistsomeone who is responsible for covering any non-filled buy/sell order for an asset
 Electronic Communication Networksa type of computer system that facilitates trading of financial products outside of stock exchanges. The primary products that are traded on ECNs are stocks and currencies
 Automated Bond Systemelectronic system on the NYSE that records bids and offers for inactively traded bonds until they are canceled or executed
 spreadask - bid
 stock marginhave to put up own funds for at least 50% of stock (rather than 50+% borrowed
 short saleprofit from decline in price of a security

1 borrow stock
2 sell stock high
3 buy back stock after lower
4 return stock
 % margin questionsPercentage margin = Equity/Value of stock owed.
 net asset valueNet asset value (NAV) is a term used to describe the value of an entity's assets the value of its liabilities.

(MV of assets) - liabilities / shares outstanding
 net asset valueNet asset value (NAV) is a term used to describe the value of an entity's assets the value of its liabilities.
 unit trustA unit trust is a form of collective investment constituted under a trust deed.
 open-end investmentAn open-end fund is equitably divided into shares which vary in price in direct proportion to the variation in value of the fund's net asset value. Each time money is invested, new shares or units are created to match the prevailing share price; each time shares are redeemed, the assets sold match the prevailing share price
 closed-end investmentA closed-end fund issues a limited number of shares (or units) in an initial public offering (or IPO). The shares are then traded on an exchange or directly through the fund manager to create a secondary market subject to market forces. If demand for the shares is high, they may trade at a premium to net asset value. If demand is low they may trade at a discount to net asset value
 front-end loada fee paid when shares are purchased. this fee typically goes to the brokers that sell the fund's shares. Front-end loads reduce the amount of your investment
 back-end loada fee paid when shares are sold. This fee typically goes to the brokers that sell the fund's shares
 fees + funds return exampleInitial NAV = $20
Income distributions of $.15
Capital gain distributions of $.05
Ending NAV = $20.10
 exchange traded fundsAn exchange-traded fund (ETF) is an investment fund portfolio traded on stock exchanges, much like stocks.
 holding period returnIn finance, holding period return (HPR) is the total return on an asset or portfolio over the period during which it was held.

HPR = (End-Of-Period Value) + (interim cash flow) - (Initial Value)) /(Initial Value)
 Expected returnssum of probs x HPRs
 VAR(HPR)sum of probs x (HPRs - expected HPR)^2
 SD(HPR)sqrt(Varhpr)
 arithmetic meanaverage of past returns
 geometric meanaverage found by:

nth root of (1 + past HPRs all multiplied together) and then - 1
 variance of historical returnssum of (HPR - AMR)^2 / T-1
 nominal interest rategrowth of your money
 real interest rategrowth of your purchasing power (nominal - inflation)
 Fisher EquationR = rr + i + (rrxi)
 Real after-tax rateATrr = R(1-t) - i
 kurtosisthinner distribution
 Terminal ValueTV = I x e^rt

i = investment
r = rate
t = time in periods
 coupon rateThe coupon or coupon rate of a bond is the amount of interest paid per year expressed as a percentage of the face value of the bond.
 floaterFloating rate notes (FRNs) are bonds that have a variable coupon, equal to a money market reference rate, like LIBOR or federal funds rate, plus a spread
 call provisionA call option, often it is simply labeled a "call", is a financial contract between two parties, the buyer and the seller of this type of option.
 put optionA put option (usually just called a "put") is a financial contract between two parties, the writer (seller) and the buyer of the option.
 convertible optiontype of bond that the holder can convert into shares of common stock in the issuing company or cash of equal value, at an agreed-upon price
 BOND PRICINGP = sum( (coupon or interest payments)/(1+semi-annual YTM or disc rate)^t + Par value / (1 + semi-annual ''')^T
 prices and yieldsinverted relationship

yield as in required rate of return


yield -> 0, value -> sum of cash flow
 Realized Yield(TV / I)^(1/T) - 1
+0
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