BFIN 300

Financial markets

Platforms where securities are purchased and sold, facilitating the exchange of financial assets and enabling efficient allocation of resources.

Stock exchange

A marketplace that allows for the buying and selling of shares in public companies.

Commodity market

Market allowing the trade of raw materials such as cotton, oranges, and oil.

Foreign exchange market

Market for trading currencies, crucial for understanding foreign capital movements.

Derivative market

A market where securities derive their value from an underlying asset.

Liquidity

The ease with which assets can be quickly bought or sold in the market.

Security

A fungible, negotiable financial instrument that holds some type of monetary value.

Primary market

The market for the first sale of securities.

Secondary market

A market where buyers and sellers exchange previously issued securities.

Dividends

Payments made to stockholders from a corporation's earnings when declared.

Supply and demand

The fundamental economic model dictating the pricing of securities based on their availability and buyer interest.

Securities and Exchange Commission (SEC)

The principal regulator of all primary and secondary markets, responsible for enforcing securities laws.

Investment bank

A financial institution that works with issuers to sell new securities and help distribute them.

Money market

Market for short-term debt securities with maturities of less than one year.

Common stock

Equity ownership in a corporation, entitled to claim dividends as declared.

Preferred stock

A type of ownership in a company that has a fixed dividend but does not confer voting rights.

Initial public offering (IPO)

The process through which a private company offers shares to the public for the first time.

Market maker

A dealer who provides liquidity by being ready to buy and sell certain shares.

Dow Jones Industrial Average

A price-weighted average of 30 significant stocks traded on the New York Stock Exchange.

S&P 500

A stock market index that measures the stock performance of 500 large companies listed on stock exchanges in the United States.

Time value of money

Concept that money available now is worth more than the same amount in the future due to its potential earning capacity.

Compounding

The process of earning interest on previously earned interest.

Equity

Ownership interest in a firm, represented by stock, entitling the owner to various types of benefits, primarily on the company's profits.

Fixed coupon bond

Paid until maturity, and lump sum is returned at maturity.

Variable rate bond

A bond with an interest rate that is reset periodically based on market conditions.

Convertible bond

A bond that can be converted into a predetermined amount of the company's equity.

Callable bond

A bond that can be redeemed by the issuer before its maturity date.

Derivative 

Securitized contract whose value is dependent upon one or more underlying assets. Its price is determined by fluctuations in that asset.

Broker

Acts to buy stock and bonds or other securities on behalf of clients of a firm, act as an agent.

Long-term securities

Traded in capital markets, principal buyers of these are financial institutions and individual investors

Financial securities

A claim against assets of cash flows of a company

Dealer

An individual or financial firm that purchases and sells securities for its own business or account.

Debt securities

Have a claim on the firms cash flows prior to equity holders, additionally the payment to debt holders is fixed. If business does well in cash flow, the debt holders will obtain their promised cash flows. They are not owners of the firm, they are creditors. As a result, they dont vote on operations of the firm.

Which security has a “residual claim” on a company’s cash flows?

Equity

Which security has the greatest preference in liquidation?

Senior debt

What’s one type of security that is traded in the US money market?

Treasury bills

A Johnson & Johnson bond pays an 8% coupon rate on a bond provided that its earnings exceed an ROE of 8%. What type of security is this?

Income bond

Income bond

A type of debt security in which only the face value of the bond is promised to be paid to the investor.

Which two cash flows are received by a typical bond?

Interest and principal at maturity

Compound interest

Interest earned on both the initial principal and the interest reinvested from the prior periods

Don Lemon invested $2,000 six years ago at 4.5%. He spends his earnings as soon as he earns any interest so he only receives interest on his initial investment. Which type of interest is Mr. Lemon earning?

Simple interest

Alan Fishman just computed the present value of a $10,000 bonus he will receive in the future. The interest rate he used in the process is referred to as?

Discount rate

Discount rate

The rate of return used to discount future cash flows back to their present value.

The process of determining he present value of future cash flows in order to know their worth today is referred to as?

Discounted cash flow valuation

Perpetuity

A security that pays a never-ending cash stream.

What is the best example of a perpetuity?

Pension plan with TIAA

I/O Security

Financial instruments that entitle investors to receive the interest payments from a pool of loans, such as mortgages, and separate them from the principal payments.

Which is the best example of an I/O security?

Mortgage

Annuity

A cash flow stream where a fixed amount is received every year.

Perpetual bond

Fixed coupon paying bond with no maturity

Zero coupon bond

A debt security which promises one payment in the future

Primary market

Securities are created and sold for the first time directly from the issuer, such as through an Initial Public Offering (IPO). Investors purchase these new securities directly from the company or government that is raising capital

Secondary market

Investors trade these securities with one another after their initial issuance

Ordinary annuity

The most common type of annuity is one in which payments are made at the end of each period, and the timing of these payments affects how interest is calculated.

Examples: mortgage, car loans, student installments

Pure discounted loans

Borrower receives a lump sum of cash and repays a single, larger lump sum at a future date. No interim payments are made. The total interest is calculated and added to the principal to create the final, single repayment.

Sale of shares

The price you receive when you sell shares, prevailing market price, no guaranteed cash flow.