Financial Markets and Investment Management Practice Flashcards

A comprehensive set of vocabulary flashcards covering basic financial system actors, asset classes, wealth creation, banking, fixed income instruments, equity markets, and derivatives based on the provided lecture notes.

Haves

Entities that possess capital and can lend it out, primarily households on a macroeconomic level.

Have-nots

Entities that have more needs than money and must raise capital, such as corporations and the government.

Net Wealth

The total value of everything an entity owns minus everything they owe, calculated as $\text{assets} - \text{liabilities}$.

Foreclosure

A legal process where a lender takes possession of a property because the borrower stopped making payments.

Tangible Assets

Real assets that derive value from their physical character and the utility they generate.

Financial Assets

Intangible assets that represent a legal claim to future cash flows.

ROE (Return on Equity)

A financial performance measure calculated as $\text{profit} / \text{equity}$.

ROA (Return on Assets)

A financial performance measure calculated as $\text{profit} / \text{assets}$.

Leverage Multiplier (LM)

The ratio of total assets to equity, used in the Dupont scheme to relate ROE to ROA: $\text{ROE} = \text{ROA} \times \text{LM}$.

Bond

A debt instrument where the borrower promises to pay periodic interest (coupons) and repay the original principal at a specified maturity date.

Technical Provisions

The money an insurance company sets aside to pay for estimated future liabilities and obligations to contract holders.

Direct Finance

A financial process where borrowers sell securities directly to lenders in financial markets without an intermediary.

Disclosure Regulation

Rules designed to prevent issuers from defrauding investors by concealing relevant information.

Basis Points

A unit of measure for interest rates where $100$ basis points equal $1\%$, meaning $2.34\%$ per annum can be stated as $234$ basis points.

Fisher Equation

The relationship between nominal and real interest rates, expressed as $(1 + r_{\text{nominal}}) = (1 + r_{\text{real}}) \times (1 + \Pi^e)$ where $\Pi^e$ is the expected inflation.

Simple Interest

Interest calculated only on the original principal amount, represented by the formula $V_T = V_0 \times (1 + r \times T)$.

Compounded Interest

An interest rate where interest is earned on both the original principal and previously accumulated interest, represented by $V_T = V_0 \times (1 + r)^T$.

Yield to Maturity (YTM)

The internal rate of return or the single discount rate that equates the present value of future cash flows to the current market value of an instrument.

Spot Rate

The return on a single cash flow that will be received at the end of a specific period $T$.

Fallen Angel

A term for a firm that has been downgraded from investment grade to speculative grade by rating agencies.

Money Markets

Markets where financial instruments with a maturity at issuance of at most $1$ year are traded.

Capital Markets

Markets for financial instruments with a maturity at issuance of more than $1$ year.

Repurchase Agreement (Repo)

A transaction involving the sale of a security with a commitment by the seller to buy it back at a specific price at a designated future date.

Haircut

The amount by which a lender discounts an asset used as collateral to protect against price fluctuations and default risk.

Commercial Paper (CP)

A short-term, unsecured promissory note issued in the open market representing the obligation of the issuing company.

Factoring

A financial transaction where a company sells its accounts receivable (invoices) to a third party (factor) at a discount for immediate cash.

American Depository Receipts (ADRs)

Negotiable certificates issued in the US by a US bank that represent a specific number of foreign shares held by a custodian.

Initial Public Offering (IPO)

The first time a company sells its shares to the general public to raise capital and obtain a market valuation.

Limit Order

An order to buy or sell a financial asset at a specific price or better.

Weak Form Market Efficiency

The theory that all past publicly available information is already reflected in asset prices, making it impossible to predict future prices based on historical data.

Efficient Frontier

A set of optimal portfolios that offer the highest expected return for a defined level of risk or the lowest risk for a given level of expected return.

Derivative

A financial instrument whose payoff depends on one or several other uncertain underlying variables.

Forward Contract

A customized bilateral agreement to buy or sell an asset at a certain time in the future for a contracted delivery price, traded over-the-counter (OTC).

Futures Contract

An exchange-traded, standardized version of a forward contract handled through a clearinghouse with margin accounts.

Swap

A bilateral contract in which two counterparties exchange series of cash flows (legs) on specified days.

Call Option

A financial security that gives the owner the right, but not the obligation, to buy an underlying asset at a fixed strike price.

Put Option

A financial security that gives the owner the right, but not the obligation, to sell an underlying asset at a fixed strike price.