Untitled Flashcards Set

Financial Markets

They channel funds from lender-savers to borrower-spenders and help with efficient capital allocation.

Primary Market

The market where new securities (stocks/bonds) are issued.

Secondary Market

The market where previously issued securities are traded such as NYSE or NASDAQ.

Bond

A loan given to a company or government where investors receive fixed interest payments.

Coupon Payment

Fixed interest payments received by bond investors.

Zero-coupon Bonds

Bonds that do not make periodic payments, providing a lump sum at maturity.

Bond Pricing

The price of a bond fluctuates based on market interest rates.

Present Value of a Bond

PV=∑ C/(1 + r)^t + FV/(1 + r)^n; calculates the current worth of future bond payments.

Yield to Maturity (YTM)

The total return anticipated on a bond if it is held until it matures.

Credit/Default Risk

The risk of the issuer failing to pay back the bond.

Inflation Risk

The risk that inflation will reduce the real purchasing power of returns.

Liquidity Risk

The risk of difficulty selling the bond at a fair price.

Call Risk

The risk that the issuer will repay the bond early, affecting returns.

Interest Rate Risk

The risk that bond prices will fall as interest rates rise.

Duration

A measure of a bond's sensitivity to changes in interest rates.

Normal Yield Curve

A yield curve where long-term bonds yield higher than short-term bonds.

Inverted Yield Curve

A yield curve where long-term bonds yield lower than short-term bonds, signaling a recession.

Bond Duration Formula

D=∑(CFt/(1 + r)^t x t)/PV; measures the time-weighted cash flows of a bond.

Yield Curve Analysis

Monitoring for steep yield curves (economic expansion) and inverted curves (possible recession).