Term
|
Definition
| Bond that pays mostly Semiannual coupons, however some can pay zero-coupons |
|
|
Term
|
Definition
| Bonds that are like currency: Whoever physically holds the bond certificate owns the bond. |
|
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Term
|
Definition
| Bond where the owner does not physically hold the bond certificate. The issuer maintains a list of all the holders and the coupons pay automatically. |
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Term
|
Definition
| Bond issued by the state and local government. |
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|
Term
Notes
Debentures
Mortage bonds
Asset-backed bonds |
|
Definition
| List the four types of corporate debt |
|
|
Term
Notes and Debentures
(Notes have shorter maturity) |
|
Definition
| Two types of unsecured corporate debt. In the case of bankruptcy, bondholders can only claim assets which are not already being used as collateral to other debt. |
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|
Term
Mortgage bond (property)
Asset-backed bond (any kind of asset) |
|
Definition
| Two types of secured corporate debt. In the case of bankruptcy, bondholders can claim specific assets which have been designated as collateral. |
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|
Term
| Principle of adverse selection |
|
Definition
| a seller with private information is likely to sell you worse-than-average goods |
|
|
Term
|
Definition
| managers will prefer to use retained earnings first, and will issue new equity only as a last resort |
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|
Term
| free cash flow hypothesis |
|
Definition
| wasteful spending is more likely to happen when firms have high levels of cash flow in excess of what is needed |
|
|
Term
|
Definition
| claims in one's self-interest are credible only if they are supported by actions that would be too costly to take if the claims were untrue |
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|
Term
|
Definition
| when a seller has private information about the value of a good, buyers will discount the price they are willing to pay due to adverse selection |
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|
Term
Gap Option
Must be exercised when the trigger price is hit, even if it results in a negative payoff |
|
Definition
Which of the following options may have a negative premium?
Asian Option
Barrier Option
Compound Option
Exchange Option
Gap Option |
|
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Term
|
Definition
| What is the embedded option for a Guaranteed minimum death benefit? |
|
|
Term
|
Definition
| What is the embedded option for an Earning Enhanced Death Benefit? |
|
|
Term
|
Definition
| What is the embedded option for a Guaranteed minimum accumulation benefit? |
|
|
Term
| Guaranteed minimum death benefit (GMDB) |
|
Definition
| Insurance product that guarantees a minimum amount will be paid to a beneficiary when the policyholder dies |
|
|
Term
| Guaranteed minimum accumulation benefit (GMAB) |
|
Definition
| Insurance product that guarantees a minimum value for the underlying account after some period of time, even if the account value is less |
|
|
Term
| Guaranteed minimum withdrawal benefit (GMWB) |
|
Definition
| Insurance product that guarantees that upon the policyholder reaching a certain age, a minimum withdrawal amount over a specified period will be provided |
|
|
Term
| Guaranteed minium income benefit (GMIB) |
|
Definition
| Insurance product that guarantees the purchase price of a traditional annuity at a future time |
|
|
Term
| Earnings-Enhanced Death Benefit |
|
Definition
| Insurance product that pays the beneficiary an amount based on the increase in the account value over the original amount invested |
|
|
Term
| GMDB with a Return of Premium Guarantee |
|
Definition
| Insurance product that returns the greater of the account value and the original amount invested |
|
|
Term
| GMAB with a return of premium guarantee |
|
Definition
| Insurance product that returns the greater of the account value and the original amount invested, but is contingent on the policyholder |
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Term
|
Definition
| costs that include fees to outside professionals like legal and accounting experts, consultants, appraisers, auctioneers, and investment bankers |
|
|
Term
|
Definition
True or False?
Compared to most other derivative offerings, weather derivatives tend not to be very actively traded |
|
|
Term
|
Definition
| Accounts for equity risk. Take a long position in the market portfolio and finance itself with a short position in the risk free asset. |
|
|
Term
| Small-Minus-Big (SMB) portfolio |
|
Definition
| Accounts for differences in company size basked on market capitalization. Buy small firms and finance itself by short selling big firms |
|
|
Term
| High-Minus-Low (HML) portfolio |
|
Definition
| Accounts for differences in returns on value stocks and growth stocks. Buy high book-to-market stocks (i.e., value stocks) and finance itself by short selling low book-to-market stocks (i.e., growth stocks) |
|
|
Term
|
Definition
| Accounts for the tendency of an asset return to be positively correlated with the asset return from the previous year. buy the top of the 30% stocks and finance itself by short selling the bottom 30% stocks. |
|
|
Term
Market Portfolio
Small-minus-big (SMB) portfolio
High-Minus-Low (HML) portfolio
Momentum |
|
Definition
| List the 4 self-financing factor portfolios that the Fama-French-Carhart (FFC) consists of |
|
|
Term
|
Definition
| In the event of a liquidation, sale, or merger of hte company, a minimum amount must be paid to preferred stockholders before any payments are made to common stockholders |
|
|
Term
| Liquididation preference = multiplier * Initial investment |
|
Definition
| How is liquidity preference calculated? |
|
|
Term
|
Definition
| Investors in later rounds might demand higher seniority than investors in earlier rounds; when instead those investors are given equal priority, they are deemed pari passu, which is latin for "on equal footing" |
|
|
Term
|
Definition
| This allows preferred stockholders to get both liquidity preference and any payments to common shareholders as if the stocks have been converted |
|
|
Term
|
Definition
| A "down round" is said to have occurred when a company raises funds at a lower price than in the previous funding round. This type of protection allows the preferred stockholder to convert their shares to a common stock at a cheaper price. (Helps increase ownership percenage) |
|
|
Term
|
Definition
| An investor may attempt to arrange the appointment of one or more of the firm's board of directors |
|
|
Term
| Asset Substitution Problem |
|
Definition
| When a firm faces financial distress, shareholders can gain from decisions that increase the risk of the firm sufficiently, even if they have a negative NPV. |
|
|
Term
| Debt overhang or Under-Investment problem |
|
Definition
| When a firm faces financial distress, it may choose not to finance new, positive-NPV projects |
|
|
Term
|
Definition
| When a firm faces financial distress, shareholders have an incentive to withdraw cash from the firm if possible |
|
|
Term
|
Definition
| When a firm has existing debt in place, shareholders may have an incentive to increase leverage even if it decreases the value of the firm |
|
|
Term
| Free Cash Flow Hypothesis |
|
Definition
| Wasteful spending is more likely to occur when firms have high levels of cash flow in excess of what is needed to make all positive-NPV investments and payments to debt holders |
|
|
Term
|
Definition
| A trustee supervises the liquidation of the firm's assets through an auction. the proceeds from the liquidation are used to pay the firm's creditors, and the firm ceases to exist. |
|
|
Term
| Chapter 11 reorganization |
|
Definition
| the firm's existing management is given the opportunity to propose a reorganization plan. While developing the plan, management continues to operate the business. the plan specifies the treatment of each creditor of the firm. the creditors must vote to accept the plan, and it must be approved by the bankruptcy court. |
|
|
Term
| mortgage-backed security (MBS) |
|
Definition
| an asset-backed security backed by home mortgages. |
|
|
Term
|
Definition
| Which is by far the largest sector of the asset backed security market? |
|
|
Term
| Ginnie Mae (Government national mortgage association |
|
Definition
| What is the largest issuer of MBS(Mortgage backed securities) in the U.S. and is explicitly backed by the full faith and credit of the U.S. government? The U.S. government provides an explicit guarantee to investors against default risk. |
|
|
Term
| Collateralized debt obligation (CDO) |
|
Definition
| What is the new asset-backed security known as when banks re-securitize asset-backed and other fixed income securities? |
|
|
Term
|
Definition
| Unlike Ginnie Mae, these government sponsored enterprises (issuing MBS) are not explicitly backed by the full faith and credit of the U.S. government. However, most investors doubt that the gov. would allow any of its agencies to default so believe these issues contain an implicit guarantee. |
|
|
Term
|
Definition
| What is the investors position if they short the put and short the stock? |
|
|
Term
|
Definition
| What is the investors position if they short the call and long the stock? |
|
|
Term
|
Definition
| What is it called when an investor longs a stock and longs a put? (guarantee a minimum selling price for stock) |
|
|
Term
|
Definition
| What is it called when an investor shorts a stock and longs a call? (guarantee a maximum purchase price for the stock |
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Term
|
Definition
| used to stabilize the price of the stock after IPO. if the demand is high, then underwriters will exercise this to increase supply. if the demand is low, then they will not need to to exercise it. |
|
|
Term
Estimating the present value of future cash flows
Estimating the value of comparable companies |
|
Definition
| what are two ways to establish a price range that provides a reasonable valuation for an IPO? |
|
|
Term
by arranging a roadshow
(underwriters or issuers travel around the country presenting the investment opportunity) |
|
Definition
| Once an initial price range is set, how do the underwriters try to determine what the market thinks of the valuation |
|
|
Term
|
Definition
| True or False, the value of an average price Asian option is less than or equal to the value of an otherwise equivalent ordinary option. |
|
|
Term
| Systematic Risk. It is well diversified |
|
Definition
| Does an efficient portfolio contain systematic risk, nonsystematic risk, or both? |
|
|
Term
True
It offers the highest level of expected return for a given level of volatility. |
|
Definition
| True or False: The efficient Portfolio has the highest sharpe ratio of any portfolio in the economy |
|
|
Term
|
Definition
| True or false: The volatility of an efficient portfolio can be reduced without lowering its expected return? |
|
|
Term
|
Definition
| True or false: We can obtain the appropriate risk premium for an investment from its beta with the efficient portfolio? |
|
|
Term
|
Definition
| True or false: barrier options are path dependent |
|
|
Term
| Synthetic long forward (i.e. selling a bond) |
|
Definition
| When you buy stock and borrow money, what do you create? |
|
|
Term
| Synthetic short forward (i.e. buying a bond) |
|
Definition
| When you sell stock and lend money, what do you create? |
|
|
Term
| Synthetic long forward (i.e. selling a bond) |
|
Definition
| When you buy a call and sell a put at the same strike price, what do you create? |
|
|
Term
| Synthetic short forward (i.e., buying a bond) |
|
Definition
| When you sell a call and buy a put at the same strike, what do you create? |
|
|
Term
|
Definition
| What is it called when the company negotiates directly with creditors to come to an agreement (Alternative to bankruptcy) |
|
|
Term
| Prepackaged bankruptcy (Or "Prepack") |
|
Definition
| What is it called wen the company first creates a reorganization plan with the agreement of its primary creditors, and then file chapter 11 reorganization to implement the plan? |
|
|
Term
|
Definition
| Due to the lack of competitive price data, the market proxy cannot include most of the trade able assets in the economy |
|
|
Term
Proxy Error
Behavioral Biases
Alternative Risk Preferences
Non-Tradable Wealth |
|
Definition
| What are four reasons why the market might not be efficient? |
|
|
Term
|
Definition
| Investors may be subject to systematic behavioral biases and therefor hold inefficient portfolios |
|
|
Term
| Alternative Risk Preferences |
|
Definition
| Some investors focus on risk characteristics other than the volatility of their portfolio, and they may choose inefficient portfolios as a result |
|
|
Term
|
Definition
| Investors are exposed to significant risks outside their portfolio. They may choose to invest less in their respective sectors to offset the inherent exposures from their human capital |
|
|
Term
|
Definition
| Investors who suffer from this type of behavioral bias typically favor investments in companies they are familiar with. |
|
|
Term
| non-systematic (does not impact the efficiency of the market and has no effect on market prices or returns) |
|
Definition
| Is familiarity bias systematic or non systematic? |
|
|
Term
|
Definition
| This type of behavioral bias causes investors to care most about how their portfolio performs relative to their peers |
|
|
Term
| non-systematic (does not impact the efficiency of the market and has no effect on market prices or returns) |
|
Definition
| Is Relative Wealth Concerns a systematic or non-systematic behavioral bias? |
|
|
Term
|
Definition
| This type of behavioral bias causes investors to overestimate their knowledge or expertise. Men tend to be more inclined to do this than women. |
|
|
Term
| non-systematic (does not impact the efficiency of the market and has no effect on market prices or returns) |
|
Definition
| Is Overconfidence Bias a systematic or non-systematic behavioral bias? |
|
|
Term
|
Definition
| This type of behavioral bias causes trading activity to increase with the number of speeding tickets an individual receives |
|
|
Term
| non-systematic (does not impact the efficiency of the market and has no effect on market prices or returns) |
|
Definition
| Is Sensation Seeking a systematic or non-systematic behavioral bias? |
|
|
Term
|
Definition
| Investors tend to hold on to investments that have lost value and sell investments that have increased in value |
|
|
Term
Systematic
(Leads investors to depart from the CAPM in systematic ways and subsequently impact the efficiency of the market) |
|
Definition
| Is the disposition effect a systematic or non-systematic behavioral bias? |
|
|
Term
|
Definition
| True or false: the disposition effect has negative tax consequences |
|
|
Term
Systematic
(Leads investors to depart from the CAPM in systematic ways and subsequently impact the efficiency of the market) |
|
Definition
| Are investors attention, mood, and experience systematic or non-systematic forms of behavioral biases? |
|
|
Term
Systematic
(Leads investors to depart from the CAPM in systematic ways and subsequently impact the efficiency of the market) |
|
Definition
| Is Herd Behavior a systematic or non-systematic form of behavioral bias? |
|
|
Term
| Information Cascade Effect |
|
Definition
| This type of behavioral bias results in investors believing others have superior information |
|
|
Term
|
Definition
| What type of behavioral Bias is the Information Cascade effect? |
|
|
Term
|
Definition
| This type of behavior bias causes Investors to follow others to avoid the risk of under performing compared to their peers |
|
|
Term
Systematic
(Leads investors to depart from the CAPM in systematic ways and subsequently impact the efficiency of the market) |
|
Definition
| Systematic or non-Systematic: Individual investors tend to be influenced by attention-grabbing news or events. They buy stocks that have recently been in the news |
|
|
Term
Systematic
(Leads investors to depart from the CAPM in systematic ways and subsequently impact the efficiency of the market) |
|
Definition
| Systematic or non-systematic: sunshine has a positive effect on mood an stock returns tend to be higher on a sunny day at the stock exchange |
|
|
Term
Systematic
(Leads investors to depart from the CAPM in systematic ways and subsequently impact the efficiency of the market) |
|
Definition
| Systematic or non-systematic: Major sports events have impacts on mood. a loss in the world cup reduces the next day's stock returns in the losing country |
|
|
Term
Systematic
(Leads investors to depart from the CAPM in systematic ways and subsequently impact the efficiency of the market) |
|
Definition
| Systematic or non-systematic: Investors appear to put inordinate weight on their experience compared to empirical evidence. People who grew up during a time of high stock returns are more likely to invest in stocks. |
|
|
Term
|
Definition
| Is semi-variance a coherent risk measure? |
|
|
Term
|
Definition
| Is variance a coherent risk measure? |
|
|
Term
Generally not.
Because it does not satisfy subadditivity. However if the distribution is normal, then it is. |
|
Definition
| is Var (Value-At-Risk)a coherent Risk Measure? Why or why not? |
|
|
Term
|
Definition
| is TVaR (Tail-Value-At-Risk) a coherent Risk Measure? |
|
|
Term
|
Definition
| True or false: If there are no dividends, delta(call) - delta(put) = 1 |
|
|
Term
|
Definition
| At the end of the roadshow, customers inform the underwriters of their interest by telling the underwriter how many shares they may want to buy. The underwriters add up the total demand and adjust the share price to customer demand so that the IPO is most likely to succeed. what is this called? |
|
|
Term
|
Definition
| adding a positive amount to a risk adds an equivalent amount to the risk measure |
|
|
Term
|
Definition
| multiplying a positive amount to a risk will adjust the risk measure in a proportional manner |
|
|
Term
|
Definition
| it is not possible to reduce the capital required to manage a risk by splitting it into separate parts. there are diversification benefits from combining risks as long as the two risks are not perfectly correlated. |
|
|
Term
|
Definition
| if one risk always exceeds another, the corresponding risk measures must be similarly ordered. |
|
|
Term
|
Definition
| True or False: in general, options increase in value when volatility increases |
|
|
Term
|
Definition
| bond issue that is sold privately to a small group of investors. cheaper to issue since, in the addition to the absence of any registration cost, a simple promissory note is used instead of an indenture. |
|
|
Term
|
Definition
| a credit commitment for a specific time period up to some limit, which a company can use as necessary. it is backed by specific assets. |
|
|
Term
|
Definition
| This option is useful for hedging guarantees that will come into effect during the payout period of a GMWB while the variable annuity is still in the accumulation period |
|
|
Term
|
Definition
| This option is a useful hedging tool for variable annuities with two-sided guarantees, e.g., a GMDB with a return-of-premium guarantee and an earnings-enhanced death benefit equal to 35% of any account value gains |
|
|
Term
|
Definition
| This option is useful for hedging variable annuity guarantees where the guarantee value is periodically recalculated as the greater of the account value and the existing guarantee value |
|
|
Term
|
Definition
| This option is useful for hedging variable annuity guarantees in situations where the guarantee value is recalculated at the discretion of the policyholder |
|
|
Term
|
Definition
| This option is a useful hedging tool when policyholders can hold multiple assets in their accounts and the guarantee applies to the account as a whole rather than individual assets in the account |
|
|
Term
|
Definition
| Specifies that the stock is sold if the price decreases to the specified amount |
|
|
Term
|
Definition
| pays the market price (ask price) to buy the stock immediately, or sells at the market price (the bid price) immediately. Used when certainty of execution is a priority over price |
|
|
Term
|
Definition
| Specifies the maximum buying price or minimum selling price. gives trader control over the price at which the trade is executed; however, the order may never be executed. used when the trader wishes to control the price rather than certainty of execution |
|
|
Term
|
Definition
| Specifies that the stock is sold if the price decreases to the specified amount. does not get filled if the price never reaches the specified price. since it is sold at the market price, actual sales price may be less than the cutoff point. |
|
|
Term
|
Definition
| calculate the value of each parameter so the project has an NPV of zero. IRR is the rate at which NPV is zero. |
|
|
Term
|
Definition
| Actual Stock Return - Expected Stock Return |
|
|
Term
|
Definition
| True or False: A portfolio is efficient if and only if the expected return of every available security equals its required return. |
|
|
Term
|
Definition
| True or False: The efficient portfolio has the highest Sharpe ratio of any portfolio in the economy. |
|
|
Term
|
Definition
| True or False: An efficient portfolio contains only systematic risk. |
|
|
Term
|
Definition
| True or False: The volatility of an efficient portfolio can be reduced without lowering its expected return. |
|
|
Term
|
Definition
| True or False: We can determine the appropriate risk premium for an investment from its beta with the efficient portfolio. |
|
|
Term
|
Definition
| What type of risk does Beta measure? |
|
|
Term
| Total Risk (market and firm specific) |
|
Definition
| What type of risk does volatility measure? |
|
|
Term
|
Definition
| True or False: In a well-diversified portfolio, market risk accounts for a considerably greater proportion of total risk than firm-specific risk. |
|
|
Term
False
It is the weighted average |
|
Definition
| True or False: A portfolio's beta is the arithmetic average of all the betas for the individual stocks in the portfolio. |
|
|
Term
|
Definition
| True or false: A stock's beta is the ratio of the covariance between the stock returns and the market returns to the standard deviation of market returns. |
|
|
Term
|
Definition
| True or False: The average beta of a stock in the market is greater than 1. |
|
|
Term
False
Physical capital: Lower costs (liquid)
Human capital: Higher costs (Illiquid) |
|
Definition
True or false:
Firms whose main assets are physical capital are likely to incur high costs when they risk financial distress. |
|
|
Term
|
Definition
True or False:
The probability of financial distress increases with the amount of a firm’s liabilities relative to its assets. |
|
|
Term
|
Definition
True or false:
The probability of financial distress increases with the volatility of a firm’s cash flows and asset values. |
|
|
Term
|
Definition
True or False:
The beta of distress costs will have an opposite sign to that of the firm. |
|
|
Term
|
Definition
True or False:
Futures contracts are essentially exchange-traded forward contracts. |
|
|
Term
|
Definition
| If a firm finances itself with only equity, what kind of firm is it? |
|
|
Term
|
Definition
| A higher volatility will always yield a higher option value |
|
|
Term
|
Definition
| True or False: Marking to market is done for futures, and it can lead to price differences relative to forward contracts |
|
|
Term
|
Definition
| True or false: Futures are more liquid; in fact, if you use the same broker to buy and sell, your position is effectively cancelled |
|
|
Term
|
Definition
| True or false: Futures are more customized, and forwards are more standardized |
|
|
Term
|
Definition
| True or false: Futures Contracts are structured to minimize the effects of credit risk (versus forwards) |
|
|
Term
|
Definition
| True or False: Futures markets, like stock exchanges, have daily price limits |
|
|
Term
|
Definition
| What type of option is a deferred rebate option? |
|
|
Term
|
Definition
| True or False: The value of a geometric average price Asian call option is always less than or equal to the value of an otherwise equivalent arithmetic average price Asian call option. |
|
|
Term
|
Definition
| True or False: As the number of averaging periods increases, the price of an average strike Asian call option increases |
|
|
Term
|
Definition
| True or False: For call options, premiums decrease more slowly (i.e., decline at a decreasing rate) as strike prices increase |
|
|
Term
False
For put options, premiums increase more quickly (i.e., increase at an increasing rate) as strike prices increase |
|
Definition
| True or False: Put premiums increase at a decreasing rate as the strike price increases |
|
|
Term
|
Definition
Evidence against EMH:
Returns have been higher in the beginning of the year and lower in the end of the year, compared to other months |
|
|
Term
|
Definition
Evidence against EMH:
Returns have been lower on Monday (and higher on friday) than on other days of the week |
|
|
Term
|
Definition
Evidence against EMH:
Returns are more volatile close to the opening and closing hours for the market. Also, the trading volumes are higher during these times. |
|
|
Term
|
Definition
Evidence against EMH:
Overreaction to new issues pushes up stock prices initially |
|
|
Term
| Earnings announcement puzzle |
|
Definition
Evidence against EMH:
Investors underreacted to the earnings announcement |
|
|
Term
|
Definition
Evidence against EMH:
There is a positive serial correlation in stock prices as investors underreact to new information |
|
|
Term
|
Definition
Evidence against EMH:
There is a negative serial correlation in stock prices as investors overreact to new information |
|
|
Term
|
Definition
Evidence against EMH:
Two stocks with claims to a common cash flow should be exposed to identical risks but perform differently |
|
|
Term
|
Definition
Evidence against EMH:
For a given political administration, its first year and last year yield higher returns than the years in between |
|
|
Term
|
Definition
Evidence against EMH:
Returns are higher before and after the company announces the stock split |
|
|
Term
|
Definition
Evidence against EMH:
Lesser- known firms yield abnormally high returns |
|
|
Term
|
Definition
Evidence against EMH:
historical data shows in the year after the super bowl, the stock market is more likely to do better if an NFC team won and worse if an AFC team won |
|
|
Term
|
Definition
Evidence against EMH:
Small-cap companies have outperformed large-cap companies on a risk-adjusted basis |
|
|
Term
|
Definition
Evidence against EMH:
Value stocks have consistently outperformed growth stocks |
|
|
Term
|
Definition
Evidence against EMH:
This also violates market efficiency, it happens when the market value of the asset significantly deviates from its intrinsic value |
|
|
Term
|
Definition
| These bonds are issued by a local body, available in a local market, and priced in the local currency. These bonds are intended for foreign investors |
|
|
Term
|
Definition
| These bonds are issued by a foreign entity but traded in a local market and priced in the local currency. These bonds are intended for local investors. |
|
|
Term
|
Definition
| These are international bonds that are not priced in the country of origin's currency. They can be traded anywhere, and the entity which issues them may be local or foreign. |
|
|
Term
|
Definition
| These bonds combine the features of domestic, foreign, and Eurobonds, and are offered for sale in several different markets simultaneously. |
|
|
Term
|
Definition
| These bonds are foreign bonds in the United States. In other countries, foreign bonds also have special names. For example, in Japan they are called Samurai bonds; in the United Kingdom, they are known as Bulldogs. |
|
|
Term
Common
Market
Non-diversifiable |
|
Definition
| What are three other names for systemic risk? |
|
|
Term
Firm-specific
Independent
Idiosyncratic
Unique
Diversifiable |
|
Definition
| What are 5 other names for Non-Systemic risk? |
|
|
Term
|
Definition
True or False?
The risk premium for diversifiable risk is zero. |
|
|
Term
|
Definition
True or False:
A collection of well-diversified portfolios can be used to calculate the expected return of a security. |
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Term
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Definition
True or false:
As leverage increases, the firm’s pre-tax WACC remains unchanged |
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Term
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Definition
True or False:
As leverage increases, the firm’s effective after-tax WACC remains unchanged. |
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Term
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Definition
True or False:
As the debt and equity costs of capital both rise when leverage is high, the effective after-tax WACC declines. |
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