FIN 323 Test 3

Treasury bills

short-term U.S. government obligations

Federal funds

short-term funds transferred between financial institutions, usually for no more than one day

Repurchase agreements (repos)

agreements involving security sales by one party to another, with the promise to reverse the transaction at a specified date and price, usually at a discounted price.

Commercial paper

(sometimes called Paper): short-term unsecured promissory notes that companies issue to raise short-term cash.

Negotiable certificates of deposit

bank-issued time deposits that specify an interest rate and maturity date and are negotiable�that is, traded on an exchange. Their face value is usually at least $100,000.

Banker acceptances (BAs)

bank-guaranteed time drafts payable to a vendor of goods.

Treasury notes and bonds

U.S. Treasury long-term obligations to finance the national debt and pay for other federal government expenditures.

State and local government bonds

debt securities issued by state and local (e.g., county, city, school) governments, usually to cover capital (long-term) improvements.

Mortgages

long-term loans to individuals or businesses to purchase homes, pieces of land, or other real property

Mortgage-backed securities

long-term debt securities that offer expected principal and interest payments as collateral. These securities, made up of many mortgages, are gathered into a pool and are thus "backed" by promised principal and interest cash flows.

Corporate bonds

long-term bonds issued by corporations.

Corporate stocks

long-term equity securities issued by public corporations; stock shares represent fundamental corporate ownership claims

derivative security

is a financial security (such as a futures contract, option contract, or swap contract) linked to another, underlying security, such as a stock traded in capital markets or British pounds sterling traded in foreign exchange (forex) markets

Unbiased Expectations Theory

According to this theory, at any given point in time the yield curve reflects the market's current expectations of future short-term rates

Liquidity Premium Theory

that investors will hold long-term maturities only if these securities are offered at a premium to compensate for future uncertainty in the security's value

Market Segmentation Theory

investors have specific maturity preferences, and to encourage buyers to hold securities with maturities other than their most preferred maturity requires a higher interest rate (i.e. a maturity premium)

total risk

The volatility of an investment, which includes current portions of firm-specific risk and market risk.

firm-specific risk

The portion of total risk that is attributable to firm or industry factors. Firm-specific risk can be reduced through diversification.

market risk

general risk that all firms�and all individuals, for that matter�face based upon economic strength both domestically and globally

efficient portfolios

Portfolios with the highest return possible for each risk level

expected return

The average of the possible returns weighted by the likelihood of those returns occurring.

asset pricing

The process of directly specifying the relationship between required return and risk

capital asset pricing model

asset measure based on a beta market measure of risk

market portfolio

In theory, this is the combination of securities that places the portfolio on the efficient frontier and on a line tangent to the risk-free rate. In practice, the S&P 500 Index is used to proxy for this

financial leverage

The use of debt to increase an investment position

beta (?)

A measure of the sensitivity of a stock or portfolio to market risk

Hedge fund

An investment fund structured to avoid regulation. are professionally managed portfolios

efficient market hypothesis (EMH)

a. theory that describes what types of information are reflected in current stock prices.
b. security prices fully reflect all available information