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42 Cards in this Set
- Front
- Back
What are two qualities of a competitive market?
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lowest costs + efficient
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What is a market failure?
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something mechanisms of competition and pricing could not handle
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What do regulations do?
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1. prevent issuers of securities from defrauding investors by withholding information
2. competition/fairness 3. stability 4. restrict foreign influences 5. control level of economic activity |
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What are disclosure regulations?
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companies must make everything public
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What is asymmetric information?
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when managers/investor have unequal access to information; aka insider trading
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What is the agency problem?
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managers in it for themselves
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What are the Securities Act of 1933 and the Securities Exchange Act of 1934?
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SA 33- disclosure regulations; issuer cannot be deceitful
SE 34- deals with periodic disclosure of company information SEC empowers both acts |
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What is the National Association of Securities Dealers (NASD)?
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SRO- self regulatory organization- regulates conduct in issuing securieties and selling them to the public
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What two organizations regulate the options and futures market?
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CFTC- Commodity Futures Trading Commission- licences and monitors futures exchanges; authorizes firms
SEC- oversees options market when underlying asset is equity |
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What is the NFA?
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National Futures Association- SRO that assists CFTC
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What does the FED do?
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responsible for nation's money and banking system; sets minimum requirements for amount of equity (shareholder contributions) that banks must have relative to their assets
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What is the OTS?
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Office of Thrift Supervision- monitors loans
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What does the International Bank Act of 1978 stipulate?
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foreign banks must select a home state and abide by geographical regulations
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Key Points about Japanese Regulation
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regulator: Ministry of Finance
exchange: Tokyo Stock Exchange unlike US: direct funding in bond markets only goes to large firms; debt securities can be issued whenever; banks can invest substantial sums in publicly traded firms (cannot do in US); foreign stocks are listed on TSE notes commercial banks can do investment banking/issue securities through a subsidiary |
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Key Points about German Regulation
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regulator: Bundesbank (central bank)
once claimed to weak on disclosure regulation; bond market is weak because cumbersome Bundesbank must approve issuances; insider trading law in 1994; regulations less stringent than US; universal banks take part in all types of financial activity; 8 stock exchanges; European Central Bank controls money supply; 1/3 of shares on main stock market are foreign |
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Key Points about England Regulation
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regulator: Department of Trade and Industry
Securities and Investment Board = SEC Bank of England = Fed stock exchange = London International Stock Exchange; numerous foreign companies listed on LISE notes: banks can own subsidiaries that are listed on the stock exchange |
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What are the reasons for regulation reform?
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1. avoid crises: 1987 stock crash; interest rate ceiling and well-being of US banks and S&Ls
2. financial innovation regulation- like inception of derivatives (1980s) 3. globalization- don't want too strong regulations to force institutions away |
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What are the 11 properties of financial assets?
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1. moneyness
2. divisibility and denomination 3. reversibility 4. cash flow 5. term to maturity 6. convertibility 7. currency 8. liquidity 9. return predictability 10. complexity 11. tax status |
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What is moneyness?
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how easily can the asset be transformed into money- costs, delay, risk?; near money- time and savings deposits, Treasury bill
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What are divisibility and denomination?
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minimum size in which a financial asset can be liquidated and exchanged for money; many bonds come in $1,000 denominations, commercial paper $25,000 units, certificates of deposit in $100,000; divisibility is desirable for inverstors but not for borrowers
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What is reversibility or turnaround cost?
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cost of investing in a financial asset and then getting out of it and back into cash again; determinants- bid-ask spread, commissions
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What does thickness of the market mean?
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thick market- many transactions
thin market- not many transactions thicker market makes assets more reversible |
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What is cash flow?
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the return that an investor will realize by holding a financial asset: dividends, coupon payments on bonds, stock price gains
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What is term to maturity?
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length of period until instrument makes its final payment or owner is entitled to demand liquidation
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What are demand instruments?
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checking accounts- creditor can ask for repayment whenever
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What is a perpetual or consul?
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promises to pay a fixed amount per year indefinitely and not to repay the principal
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What are call provisions?
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debtor can repay in advance
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What is a put option?
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investor can ask for early repayment
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What is convertibilty?
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ability to convert assets in one class or among classes
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What is a convertible bond?
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a bond that the holder can change into equity shares
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What is currency?
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must take into consideration currency ratios
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What is liquidity?
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how much sellers stand to lose if they wish to sell immediately as against engaging in a costly and time-consuming search
illiquid assets: stock of small company, bond issued by small school district- thin market |
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What are some determinants of liquidity?
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1. is the market thick or thin?
2. contractual agreements 3. quantity of asset to be sold |
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What is return predictability?
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how much return volatility is there?; how risky are the cash flows?
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What is complexity?
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some assets are combinations of two or more simpler assets; must break them down to find value
complex assets: convertible bond, bond that has payments that can be made in different currency |
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What is a callable bond?
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issuer who can repay debt prior to maturity
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What is a putable bond?
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bond that can be sold back to the issuer at a fixed price
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What is tax status?
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different assets are taxed differently; different geographical places have different taxes; different years have different taxes
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What is present value?
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correct price of an asset equals present value of all cash flows that the owner of the asset expects to recieve during its life
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What is the discount rate?
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return that the market requires on an asset; sum of real rate of interest; inflation premium; default risk premium; maturity premium; liquidity premium; exchange-rate risk premium
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What is duration?
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the approximate percentage change in price for a 100 basis point change in interest rates around the prevailing yield; the larger the yield change, the poorer the approximation that duration provides
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What is the difference between modified duration and effective duration?
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effective duration takes into account the cash flow changes that occur when the interest rate changes
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