Ch. 17, 18, 19, 20

Primary Market

financial markets dealing with financial claims that are newly issued

Secondary Market

financial markets for exchanging financial claims previously issued (market for seasoned securities)

Privatization

process of offering securities of government-owned companies to private investors

Prospectus

what is issued for disclosure of information about the securities an entity is planning to issue, which provides "full and fair disclosure of character of securities sold in interstate and foreign commerce though the mails"

Rule 415 (Shelf Registration Rule)

rule approved by SEC permitting certain issuers to file single registration document indicating that it intents to sell a certain amount of a certain class of securities at one or more times in the next two years

Individual Accredited Investor

individual meeting certain annual income and/or net worth thresholds

Institutional Accredited Investor

includes entities as banks, insurance companies, mutual funds, and venture capital funds

bought deal

refers to offering of security whereby underwriter agrees to purchase all of security from issuer at fixed price without premarketing deal before purchasing from issuer

Dutch Auction

auction where single price will be paid by all bidders

Pre-emptive rights offering

allows corporation to issue new common stock directly to existing shareholders and allows them right to buy some proportion of new shares at price below market value

Subscription price

price at which new shares can be purchased

standby underwriting arrangement

used in instances where issuing corporation uses services of an investment banker for distribution of common stock that is not subscribed to; arrangement calls for underwriter to buy unsubscribed shares

standby fee

fee the issuing corporation pays to investment banking...

completely segmented market

market where investors in one country are not permitted to invest in securities issued by entity in another country

Completely Integrated Market

market with no restrictions preventing investors from investing in securities issued in any capital market throughout the world

Mildly Segmented/Integrated Market

real-world capital markets tend to be a mix of segmented and integrated markets, which implies that world capital markets offer opportunities to raise funds at lower cost outside local capital market

Base Rate

one factor of cost of debt; interest rate on US Treasure security with same maturity or some other low-risk security

Spread

second factor of cost of debt; reflects greater risks that investors perceive as being associated with issue or issuer

Natural Buyers/Sellers

potential party to trade; take position for their own portfolio

broker

third party acting on behalf of buyer/seller who wishes to execute order

dealer

intermediary is trade by buying/selling for own account

principal

dealer commits own capital to accommodate trade sought by other parties, and thus acts as a principal in a trade

bid-ask spread

difference between price at which dealer is willing to offer a financial asset to investors (ask price) and price at which dealer is willing to buy financial asset from investors (bid price)

market maker

dealer having special obligation to use its capital to make an orderly market for designated financial assets in secondary market

order-driven/auction market

market where all participants in trade are natural b/s, so there is no dealer

quote-driven/dealer/dealership market

market determined by dealer and is based on prevailing market information where dealer stands ready to buy/sell financial asset at price it quotes

continuous order-drive market

market where prices are determined continuously throughout the trading day as b/s submit orders, so prices may vary with the pattern of orders reaching the market and not because of any change in the basic situation of s/d

periodic call auction

another type of order-drive market where orders are grouped together for simultaneous execution at preannounced times

price scan auction

auction where an auctioneer announces tentative prices and the participants physically present respond indicating how much they would be willing to buy/sell at each tentative price

sealed bid/ask auction

auction where bid/ask price and the quantities a participant is willing to transact are submitted

exchanges

secondary markets that legally established national securities exchanges

OTC Market

market where non-exchange-traded products are traded

perfect market

the ideal characteristics of secondary markets

frictions

various costs and impediments that occur in a market; perfect markets are free of them

selling short

practice of selling securities that are not owned at the time of sale

immediacy

when b/s do not want to wait for arrival of sufficient orders on the other side of the trade, which would bring the price closer to the level of recent transactions

limit orders

special orders that can be executed only if the market price of the asset changes in a specified way

specialists

dealers of the organized markets; their privileged positions allow them to get special information about the flow of market orders

auctioneer

provides order and fairness in the operations market; in some market structures, the dealers act as the auctioneer

dealer's position

can involve either long or short position

long position

carrying inventory of a security

short position

selling a security that is not in an inventory

Operationally/Internally Efficient Market

market where investors can obtain transaction services as cheaply as possible, given the costs associated with furnishing those services; this is distinct from a pricing/externally efficient capital market

execution costs

represent the difference between the execution price of a security and the price that would have existed in the absence of the trade; further decomposed into market/price impact and market timing costs

market impact cost (impact cost)

result of bid-ask spread and price concession extracted by dealers to mitigate their risk that an investor's demand for liquidity is information motivated

marketing timing cost

arises when adverse price movement of security during the time of the transaction can be attributed in part to other activity in the security and is not the result of a particular transaction

information-motivated trades

occur when investors believe they possess pertinent information not currently reflected in the security's price

informationless trades

result from either reallocation of wealth or implementation of an investing strategy that depends only on existing public information

opportunity cost

may arise when desired trade fails to be executed and represents the difference in performance between an investors desired investment and the same investor's actual investment after adjusting for execution costs, commissions, and fees

pricing efficiency

refers to market where prices at all times fully reflect all available information that is relevant to the valuation of securities

weak efficiency

when price of security reflects the past price and trading history of the security

semi-strong efficienct

when price of security fully reflects all public information, which includes but is not limited to historical price and trading patterns

strong efficiency

exists in market where price of a security reflects all information, regardless of whether it is publicly available

indexing

strategy seeking to match performance of some financial index

etrading

securities buyers and sellers are mainly brought together through electronic trading platforms

straight-through processing

systems for clearing and settlement of trades are integrated in trading systems

foreign exchange/currency risk

risk that currency's value may change adversely

exchange rate

amount of one currency that can be exchanged for a unit of another currency

direct quotation

number of units of a local currency exchangeable for one unit of a foreign currency

indirect quotation

number of units of a foreign currency that can be exchanged for one unit of the local currency

American terms

quoting in terms of US dollars per unit of foreign currency

European terms

quoting in terms of the number of units of the foreign currency per US dollar

purchasing power parity

relationship in which the exchange rate - domestic price of the foreign currency - is proportional to domestic inflation rate and inversely proportional to foreign inflation

theoretical cross rates

theoretical exchange rate between two countries other than US as inferred from their exchange rates with the US dollar

triangular arbitrage

arbitraging to take advantage of cross-rate mispricing between the US dollar and two foreign currencies

sovereign debt

debt issued by highest level of government in particular country

discount security

government-issued security that pays single cash flow at end of its life

coupon security

government-issued security that is issued with stated rate of interest, makes interest payments periodically, and has terminal payment equal to principal value

inflation-adjusted securities

securities adjusting the payments to investors for some measure of the country's inflation rate

floating-rate securities

securities whose interest payments change periodically according to a predetermined coupon formula

coupon formula

formula according to which a coupon rate for a floating-rate security resets periodically, and which consists of a reference rate and quoted margin

inflation-linked bonds

securities whose interest rate is tied to rate of inflation

Treasury Inflation Protected Securities (TIPS)

inflation-linked securities that carry full faith and credit of the US government

single-price/uniform-price auction

auction for marketable securities in which competitive bids are accepted at the highest yield of accepted competitive tenders

multiple-price auction

auction for marketable securities in which competitive bids are accepted for yields that are ranked from lowest to highest, starting from the lowest yield bid and going until the amount to be distributed to the bidders is completely allocated

syndication

process by which governments appoint a group of financial institutions that, for a negotiable fee, will subscribe to the entire bond issue and sell it to other investors

underwriting

alternative method for selling government securities, in which an underwriter subscribes to an entire debt issue at a minimum price established by the government and can then retain the portion of the issue it desires and sell the rest to the investors

tap sale

method of distributing securities that allows issuers to sell additional bonds from past issues

primary dealer

designated intermediary who, in exchange for special status, is obligated to be meaningful participants in the primary market and an active market maker in the secondary market

settlement

process that occurs after a trade is made, in which the bonds are delivered to the buyer for payment received from the seller

on-the-run/current issue

most recently auctioned issue of a particular maturity Treasury

off-the-run issue

security that is replaced by on-the-run issue

interdealer brokers

intermediaries through which Treasury dealers trade with the investing public and with other dealer firms

stripping

market participants separate a bond's individual coupon payments and trade them as separate zero-coupon securities

reconstitution

process by which dealers recombine the appropriate zero-coupon securities and reproduce the underlying coupon sovereign debt instrument

repurchase agreement

sale of security with simultaneous agreement by seller to buy same security back at future date from purchaser at agreed on price

repo rate

interest rate on repurchase agreement

repurchase date

date on which security in repurchase agreement is repurchased

term repo

a term that is more than one day in a repurchase agreement

hot/special collateral

collateral of particular interest to lenders of cash

general collateral

collateral that is not of any one particular interest

reverse repurchase agreement

repurchase agreement in which a dealer lends money and accepts securities as collateral

credit risk

the probability that a borrower will default on its obligations

local/foreign currency debt rating

one of two sovereign debt rating assigned by credit rating agencies

economic risk

assessment of ability of government to satisfy its obligations

political risk

assessment of willingness of a government to satisfy its obligations

Project Finance Initiatives

public-private partnership or direct financing of projects when countries turn to private sector for financing infrastructure projects

Public-Private Partnership (PPP)

agreement between public/government department and private sector entity calling for procurement/building/development of facility/service that shares risks/rewards between both sectors

Private Finance Initiative (PFI)

privately funded project

green bonds

financial instruments whose proceeds are used to finance new/existing green projects