Investment Principles Midterm Review - Richard Iwuc

Comprehensive vocabulary flashcards covering the investment environment, money markets, stock indices, trading mechanics, risk/return statistics, bond pricing, and capital allocation as presented in the Summer 2026 Investment Principles course.

Money Market

A subsector of the fixed-income market consisting of short-term, liquid, low-risk debt instruments often trading in large denominations.

Treasury Bills (T-bills)

Short-term government debt obligations issued by Canada and provinces with maturities of 1, 3, 6, or 12 months; they are the most marketable of all Canadian money market instruments.

Ask Price

The price an investor would have to pay to buy a security (like a T-bill) from a securities dealer.

Bid Price

The price an investor would receive for selling a security to a dealer; it is slightly lower than the ask price.

Bid-ask Spread

The difference between the bid and ask prices, representing the dealer's source of profit.

Certificate of Deposit (CD)

A time deposit with a chartered bank.

Guaranteed Investment Certificate (GIC)

A time deposit similar to a Certificate of Deposit (CD) but for smaller amounts.

Commercial Papers

Short-term unsecured debt notes issued by well-known companies.

Bankers’ Acceptances

An order to a bank by a customer to pay a sum of money on a future date, endorsed by the bank for a stamping fee; widely used in foreign trade.

Eurodollars

$U.S. Dollar$-denominated time deposits in banks outside the $U.S.$

Repurchase Agreements (Repos)

Short-term (usually overnight) borrowing backed by government securities.

Bond-equivalent Yield (Canada)

A yield calculation for T-bills based on the purchase price denominator and a $365$-day year: $r_{BEY} = \frac{1000 - P}{P} \times \frac{365}{n}$.

Bank-discount Method (USA)

A yield calculation for T-bills based on the par value denominator and a $360$-day year: $d = \frac{1000 - P}{1000} \times \frac{360}{n}$.

Market-value-weighted Index

An index where each security's contribution is its total market value, meaning large, highly valued stocks have more weight (e.g., TSX composite, S&P 500).

Price-weighted Index

An index calculated by including one share of each security; it overweights high-priced stocks (e.g., DJIA).

Equally-weighted Index

An index where each security adds an equal proportion to the calculation.

Primary Market

The market for new security issues where the issuer receives the proceeds from the sale.

Secondary Market

The market where investors trade previously issued securities among themselves without direct involvement from the issuer.

Market Order

An order to execute immediately at the current market price.

Margin Ratio

The ratio of net worth (equity value) to the market value of the assets: $\text{Margin Ratio} = \frac{\text{Market Value of Assets} - \text{Debt}}{\text{Market Value of Assets}}$.

Short Sale

A strategy that allows investors to sell a borrowed security first and buy it back later to profit from a price drop.

Nominal Interest Rate (R)

The growth rate of money value.

Real Interest Rate (r)

The growth rate of purchasing power, which takes the inflation rate into account.

Holding Period Return (HPR)

The total return from an investment including price changes and any cash flows (dividends/coupons) earned during the period: $HPR_{t, t+j} = \frac{P_{t+j} - P_t + CF_t}{P_t}$.

Effective Annual Return (EAR)

The percentage change calculated over a $1$-year horizon, assuming the investment return is maintained and compounded.

Annual Percentage Rate (APR)

A return annualized using simple interest rather than compound interest, calculated as $APR = r_T \times \frac{1}{T}$.

Risk Premium

The expected return of an asset above the risk-free rate; it represents the compensation for taking on risk.

Sharpe Ratio

A measure of the reward-to-risk tradeoff, calculated as the risk premium divided by the standard deviation of excess returns: $S = \frac{E(r) - r_f}{\sigma}$.

Value-at-Risk (VaR)

A return level that an investor could expect to do worse than $X\%$ of the time based on an assumed probability distribution.

Conditional Tail Expectation (CTE)

The expected loss given that the outcome falls within the worst $X\%$ of possible outcomes; also known as Expected Shortfall (ES).

Par Value

The face value or the payment to the bondholder on the bond's maturity date.

Coupon Rate

A bond's interest payments per dollar of par value.

Zero-coupon Bond

A bond that makes no coupon payments and is issued at a price lower than par value.

Invoice Price (Dirty Price)

The actual price an investor pays for a bond, equal to the quoted (clean) price plus accrued interest.

Yield to Maturity (YTM)

The interest rate that makes the present value of a bond's payments equal to its price; it is the bond's internal rate of return.

Current Yield

The bond's annual coupon payment divided by its market price.

Spot Rate

The yield to maturity of a zero-coupon bond for a specific maturity period.

Forward Rate

The interest rate inferred from the yield curve that is enough to make a rollover strategy equal to a long-term investment strategy.

Macaulay Duration

The weighted average of the times to each coupon or principal payment of a bond.

Modified Duration

An approximation of the percentage change in a bond's price for a $100\,bp$ ($1\%$) change in yield: $D^* = \frac{D}{1 + \text{periodic rate}}$.

Immunization

A technique used to shield a portfolio's financial status from interest rate risk by matching the duration of assets and liabilities.

Convexity

The measure of the curvature in the relationship between bond prices and yields; it accounts for the non-linear nature of price changes.

Liquidity Preference Theory

The theory that forward rates exceed expected future short rates, with the difference being a positive liquidity premium that compensates for longer-term risk.

Coefficient of Risk Aversion (A)

A parameter in the utility function that represents an investor's degree of distaste for risk.

Capital Allocation Line (CAL)

The line representing the investment opportunity set created by combining a risky portfolio with a risk-free asset.