Final Exam Cheat Sheet

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Ch.1 financial intermediation results from economies of scale and the specialization of financial transactions. (banks, inv. companies [mutual & pension funds], insurance companies, credit unions, brokerage firms, investment banks). Inv. banks assist firms in raising capital, create the market for innovative new securities that meet the risk and return demand (CMOs, collateralized mortgage obligations – derivative security that separates the cash flows of a mortgage pool into different classes with different maturities and risks). risk and return are the most important characteristics of financial assets. Another is tax. (high tax-bracket investors would, other things equal, would prefer tax-exempt securities [municipal bonds]).…show more content…
spreads are commissions to dealers. dealers are called a specialist (one security, one dealer) in major exchange markets [specialists only sometimes act as a dealer, but primary job is to execute limit orders that investors submit. some trades are executed inside the quoted ask and bid prices; this occurs when two brokers agree on a price without the specialist directly involved.], or market makers (one security, many dealers) in the OTC market. commission is another transaction cost. Some on-line brokers have lowered the commission rate and partly profit from “paying for order flow” (the practice stating that brokers may be compensated by specific dealers by directing orders to these dealers). buying on the margin is borrowing money (a broker’s call money) to buy a security. margin is the ratio of net worth [(total security value – amount borrowed)/total security value]. SEE TEXT FOR EXAMPLE OF HOW TO COMPUTE. short-selling is (borrowing and) selling a security that an investor does not already own. Short seller must purchase the security later to replace the shares that were borrowed. short sales have some restrictions: 1)up-tick rule (short sales are allowed only when the most recent price change was an increase); 2)investors must put up margin as collateral and generally are not allowed to use the sale proceed until the shares are replaced. Important regulations: 1)SEC ensures all relevant facts are disclosed; 2)circuit breakers (trading halts
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