1.

Investment
- commitment of current resources in the expectation of deriving greater resources in the future.
- monetary asset purchased with the idea that the asset will provide income in the future or will later be sold
at a higher price for a profit.
2. Real Asset
- assets used to produce goods and services.
- Physical assets that have value due to their substance and properties.
3. Financial Asset
- Claims on real assets or the income generated by them.
- Non-physical asset whose value is derived from contractual claims.
4. Fixed-income (debt) Securities
- Pay a specified cash flow over a specified period.
5. Equity
- An ownership in a corporation.
6. Derivative Securities
- Securities providing payoffs that depend on the values of other assets.
7. Financial Intermediaries/Connectors
- Entities that act as middlemen between two parties in a financial transaction.
- Connectors of borrowers and lenders
8. Households (net savers)
- Suppliers of capital
- They purchase the securities issued by firms that need to raise funds.

9. Risk Tolerance Investor

- The degree of variability in investment returns that an investor is willing to withstand.
10. Systematic Risk/Market Risk/Nondiversifiable Risk
- the risk that remains even after diversification.
- Common to whole economy.
11. Nonsystematic Risk/Unique Risk/Diversifiable Risk
- Risk that can be eliminated by diversification
12. Financial Markets
- Allow individuals to separate decisions concerning current consumption from constraints that otherwise
would be imposed by current earnings.
13. Primary Market
- market where newly issued securities are offered to the public.
14. Secondary Market
- A market where pre-existing securities are traded among investors.
15. Money market
- Include short term, highly liquid, and relatively low-risk debt instruments.
16. Capital Market
- Allow the risk that is inherent to all investments to be borne by investors most willing to bear that risk.
17. Bond market
- Composed of longer-term borrowing or debt instruments than those that trade in the money market.
18. Sarbanes-Oxley Act
- Tighten the rules of corporate governance.
19. Efficient Markets
- Active Management – finding mispriced securities, timing the market.
- Passive Management – no attempt to find undervalued securities, no attempt to time the market, holding a
highly diversified portfolio.
20. Financial Crisis of 2008
- Global financial crisis
21. Housing Bubble
- A run-up in housing prices fueled by demand, speculation, exuberance.
22. Subprime Mortgage
- A type of loan granted to individuals with poor credit scores, who, as result of their deficient credit histories,
would not be able to qualify for conventional mortgages.
23. Collateralized debt obligation (CDO)
- A structured financial product that pools together cash-flow generating assets and repackages this asset pool
into discrete tranches that can be sold to investors.
24. Credit Default Swap (CDS)
- A financial derivative or contract that allows an investor to “swap” or offset his or her credit risk with that of
another investor.
25. Systemic Risk
- The possibility that an event at the company level could trigger severe instability or collapse an entire industry
or commerce.
26. Major Law regulating financial institutions in response to the financial crisis
- Dodd-Frank Wall Street Reform and Consumer Protection Act
- Volcker Rule – to limit speculative investments
- Systematically Important Financial Institution (SIFI)
- Emergency Economic Stabilization Act
- Helping Families Save their Homes Act
- Homeless Emergency Assistance and Rapid Transition to Housing Act (HEARTH)
27. Certificate of Deposit
- A bank time deposit
- a savings certificate with a fixed maturity date and specified fixed interest rate that can be issued in any
denomination aside from minimum investment requirements.
28. Treasury Bills
- Short-term government securities issued at a discount from face value and returning the face amount at
maturity.
29. Commercial Paper
- Short-term unsecured debt issued by large corporations.
30. Banker’s Acceptance
- An order to a bank by customer to pay a sum of money at a future date.
31. Derivative Market
- Options and future provide payoffs that depend on values of the other assets.
- a derivative is a security that gets its value from the values of another asset.
32. Privately-held Firms
- Have fewer obligations to release FS and other information to the public.
33. Initial Public Offering
- First sale of stock by a formerly private company.
34. Publicly-Traded Companies
- It will sell its securities to the general public and allow those investors to freely trade those shares in the
established markets.
35. Shelf Registration
- The securities are ready to be issued
36. Types of Markets
- Direct Search Markets – buyers and sellers must seek each other out directly.
- Brokered Markets – brokers find it profitable to offer search services to buyers and sellers.
- Dealer Markets – markets in which traders specializing in particular assets buy and sell for their accounts.
- Auction Market – market where all traders meet at one place to buy or sell an asset.
37. Algorithmic Trading
- The use of computer programs to make rapid trading securities.
38. High Frequency Trading
- A subset of algorithmic trading relies on computer programs to make very rapid trading decisions.
39. Dark pools
- Electronic trading networks where participants anonymously buy or sell large blocks of securities.
40. Buying on Margin
- Margin = (Equity in Account/Value of Stock)
41. Mutual Funds
- is a company that pools money from many investors and invests the money in securities such as stocks, bonds,
and short-term debt.
42. Rate of Return

43. Time-weighted Average Return/Geometric Return

- It ignores the quarter-to-quarter variation in funds under management
44. Technical Analysis
- Research on recurrent and predictable stock price patterns and on proxies for buy or sell pressure in the
market.
45. Magnitude Issue
- The issue suggests that the actions of intelligent investment managers are driving force behind market prices
trading at fair levels.
46. Behavioral Finance
- The study of the influence of psychology on the behavior of investors or financial practitioners and ultimately,
the subsequent effect on the markets.

Information Processing (41-44)

47. Forecasting Errors

- Too much weight is placed on recent experiences.
48. Overconfidence
- Investors overestimate their abilities and the precision of their forecasts
49. Conservatism
- Investors are slow to update their beliefs and under react to new information
50. Sample Size Neglect and Representativeness
- Investors are too quick to infer a pattern or trend from a small sample

Behavioral Biases (45-48)

51. Framing
- Decisions are affected by how choices are posed.
52. Mental Accounting
- Is a specific form of framing in which people segregate certain decisions.
53. Regret Avoidance
- Investors blame themselves more when an unconventional or risky bet turns out badly
54. Prospect Theory
- Investor utility depends on gains or losses from investors starting position rather than on their levels of
wealth.
Limits to Arbitrage (49-51)

55. Fundamental Risk

- Intrinsic value and market value may take too long to converge.
56. Implementation Costs
- Transactions costs and restrictions on short selling can limit arbitrage activity.
57. Model Risk
- One always has to worry that an apparent profit opportunity is more apparent than real.
58. Parties to a Bond
- Bond Issuer – borrower
- Bond Holder – lender/investor
59. Face Value
- the money amount the bond will be worth at maturity; it is also the reference amount the bond issuer uses
when calculating interest payments.
60. Coupon Rate
- the rate of interest the bond issuer will pay on the face value of the bond, expressed as a percentage.
61. Coupon Dates
- the dates on which the bond issuer will make interest payments.
62. Maturity Date
- the date on which the bond will mature and the bond issuer will pay the bondholder the face value of the
bond.
63. Issue Price
- the price at which the bond issuer originally sells the bonds.
64. Bond Indenture
- a legal document or contract between the bond issuer and the bondholder that records the obligations of
the bond issuer and benefits owed to the bondholder.
65. Call Provisions on Corporate Bonds/Callable Bonds
- A debt instrument in which the issuer reserves the right to return the investor's principal and stop interest
payments before the bond’s maturity.
66. Convertible Bonds
- A type of debt security that can be converted into a predetermined amount of the underlying company's
equity at certain times during the bond's life, usually at the discretion of the bondholder.
67. Puttable Bonds
- A bond with an embedded put option, giving bondholders the right, but not the obligation, to demand early
repayment of the principal from the issuer or a third party acting as an agent for the issuer.
- The put option on the bond can be exercised upon the occurrence of specified events or conditions or at a
certain time or times prior to maturity.
- In effect, bondholders have the option of "putting" bonds back to the issuer either once during the lifetime
of the bond (known as a one-time put bond), or on a number of different dates.
68. Floating Rate Bonds/Floating Rate Note
- is a debt instrument with a variable interest rate.
- A floating rate note’s interest rate, since it is not fixed, is tied to a benchmark such as the U.S. Treasury bill
rate, LIBOR, the Fed funds or the prime rate.
69. Inverse Floaters
- bond or other type of debt whose coupon rate has an inverse relationship to a benchmark rate.
- An inverse floater adjusts its coupon payment as the interest rate changes.
70. Asset Backed Bonds
- allow issuers to generate more cash, which, in turn, is used for more lending while giving investors the
opportunity to invest in a wide variety of income-generating assets.
71. Pay in Kind Bonds
- is a type of bond that pays interest in additional bonds rather than cash.
- The bond issuer incurs additional debt to create the new bonds for the interest payments.
72. Zero-coupon Bond
- A debt security that doesn’t pay interest (a coupon) but it is traded at a deep discount, rendering profit at
maturity when the bond is redeemed for its full-face value.
73. Catastrophe Bonds
- has a special condition that states if the issuer, such as the insurance or reinsurance company, suffers a loss
from a particular predefined catastrophe, then its obligation to pay interest and/or repay the principal is
either deferred or completely forgiven.
74. Indexed Bonds
- bond in which payment of interest income on the principal is related to a specific price index, usually the
Consumer Price Index.
- This feature provides protection to investors by shielding them from changes in the underlying index.
- The bond's cash flows are adjusted to ensure that the holder of the bond receives a known real rate of
return.
75. Bond Yield to Maturity
- The discount rate that makes the present value of a bond payments equal to its price.
76. Bond Yield to Call
- a bond or note if you were to buy and hold the security until the call date, but this yield is valid only if the
security is called prior to maturity.