Sales & Trading Technical Interview Guide

Comprehensive vocabulary flashcards covering technical finance concepts, stocks, fixed income, central bank policies, foreign exchange, options, and derivatives from the Sales & Trading Interview Study Guide.

Common Stock

An ownership stake in a company without a guaranteed return; it is more volatile than debt because its value fluctuates directly with the value of the firm.

Market Value of Equity

The total value of a company's equity calculated as $\text{stock price} \times \text{number of shares outstanding}$.

Preferred Stock

A hybrid financing security whose holders receive an interest-like return called a dividend and hold priority over common stockholders to company assets during bankruptcy, while ranking below bondholders.

Seniority of Creditors

The legal priority order for claiming the assets of an insolvent company: 1) Bondholders, 2) Preferred stockholders, and 3) Common stockholders.

Stock Split

A division of existing shares designed to lower the share price to maintain liquidity, which theoretically neither creates nor destroys value but typically serves as a positive market signal.

Stock Buyback

A company repurchasing its own stock from the market, which signals management believes shares are undervalued, reduces outstanding shares to increase earnings per share, and increases the debt tax shield.

Debt Tax Shield

The tax reduction resulting from the deductibility of interest expenses on debt; when a firm's net debt ($\text{net debt} = \text{debt} - \text{cash}$) increases, the debt tax shield rises and enhances firm valuation.

Bond

A borrowing arrangement through which the issuer (borrower) sells an IOU document to the investor (bondholder), obligating the borrower to make specified payments on agreed-upon dates.

Par Value

Also called face value, the total principal amount that a bond issuer commits to pay back to the bondholder at the end of the bond's maturity period.

Coupon Rate

The annual interest payment on a bond divided by the bond's par value ($\frac{\text{Coupon}}{\text{Par Value}}$).

Default Premium

The spread between the promised yield on a corporate bond and the yield on an otherwise identical government bond, compensating the investor for default risk.

Investment Grade Bonds

Bonds that receive high credit ratings from rating agencies (rated Baa, BBB, or better) and pay a relatively low rate of interest.

Junk Bonds

Also known as high-yield bonds, these carry poor credit ratings and must pay a relatively high rate of interest to compensate investors for higher default risk.

The Long Bond

The standard market term for the $30\text{-year}$ U.S. Treasury bond.

Yield to Maturity (YTM)

The average rate of return earned on a bond if it is purchased at its current market price and held until its maturity date.

Callable Bond

A bond that grants the issuer the contractual right to buy back and retire the debt prior to its maturity date, typically exercised when prevailing interest rates drop.

Yield to Call

The rate of return calculated on a callable bond assuming it is held only until the period when the issuer calls it back.

Zero Coupon Bond

A bond that offers no periodic coupon payments, is sold at a significant discount to par value, and pays only its face value upon maturity.

Forward Rate

An agreed-upon interest rate for a bond that is scheduled to be issued at a specified future date.

Open Market Operations

A monetary policy mechanism wherein the Federal Reserve buys or sells government securities to expand or contract the money supply in the macroeconomy.

Discount Rate

The interest rate charged by the Federal Reserve to commercial banks on short-term loans.

Federal Funds Rate

The short-term interest rate that commercial banks charge each other to borrow funds overnight.

Prime Rate

The benchmark interest rate that commercial banks charge on loans to their most creditworthy corporate customers.

Reserve Requirements

The minimum deposit balance that member banks of the Federal Reserve System are legally required to maintain in reserve accounts with the Fed.

General Obligation Bond (GO)

A type of municipal bond issued to raise immediate capital to cover general government expenses, supported by the taxing power of the issuer.

Revenue Bond

A type of municipal bond issued to fund infrastructure projects, backed exclusively by the income generated by those specific projects.

Municipal Bond Ladder

A passive portfolio strategy consisting of a series of municipal bonds with staggered maturity dates and interest rates, where principal from each maturing bond is reinvested into a new bond.

Mortgage-Backed Security (MBS)

An asset-backed security secured by a pool of mortgages from regulated financial institutions, redirecting principal and interest payments from homeowners to investors.

Spot Exchange Rate

The current market price of one currency relative to another for immediate delivery and exchange.

Forward Exchange Rate

The price agreed upon today at which two currencies can be bought and sold for delivery at a specified date in the future.

Currency Appreciation

An increase in the value of a currency relative to other currencies under a flexible exchange rate system.

Currency Depreciation

A decrease in the value of a currency relative to other currencies under a flexible exchange rate system.

Currency Revaluation

An official upward adjustment of a currency's exchange rate enacted by government action within a fixed exchange rate system.

Currency Devaluation

An official downward adjustment or weakening of a currency's exchange rate enacted by government policy within a fixed exchange rate system.

Capital Market Equilibrium (CME)

The economic principle stating that global currency markets must exist in equilibrium so that no riskless arbitrage opportunity exists when shifting capital between two currencies.

Hedging

A financial risk management strategy designed to reduce investment risk by taking an offsetting or balancing position in the market.

Call Option

A derivative contract granting the holder the right, but not the obligation, to buy an underlying asset at a specified strike price on or before an expiration date.

Put Option

A derivative contract granting the holder the right, but not the obligation, to sell an underlying asset at a specified strike price on or before an expiration date.

Strike Price

Also called the exercise price, the predetermined price at which the owner of an option can buy (call) or sell (put) the underlying asset.

In the Money (ITM)

A condition in which an option possesses intrinsic value; for a call, when the stock price is above the strike price, and for a put, when the stock price is below the strike price.

Out of the Money (OTM)

A condition in which an option has no intrinsic value; for a call, when the strike price is above the current stock price, and for a put, when the strike price is below the current stock price.

At the Money (ATM)

A condition where an option's exercise price is exactly equal to the current market price of the underlying asset.

Option Writer

The seller of an option contract who receives a non-refundable upfront fee (premium) and incurs the obligation to fulfill the contract if the buyer exercises it.

Forward Contract

A private, customized agreement traded over-the-counter that mandates the deferred delivery of an asset at a predetermined sales price.

Futures Contract

A standardized, liquid contract traded on a public exchange that mandates the delivery of an asset (or its cash value) at a specified date and price, settled daily.

Interest Rate Swap

A derivative contract between two parties to exchange future interest cash flows, typically swapping a fixed-rate obligation for a floating-rate obligation such as LIBOR.

Foreign Exchange Swap

A predetermined agreement between two counterparties to exchange currencies at set rates to hedge against foreign exchange rate volatility.