Investments 7-11
Terms
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- Clean Price
- The price of a bond net of accrued interest; this is the price that is typically quoted.
- Support Level
- Price or level below which a stock or the market as a whole is unlikely to fall.
- Basis Point
- With regard to interest rates or bond yields, one basis point is 1% of 1%.
- Dirty Price
- The price of a bond including accrued interest, also known as the full or invoice price. This is the price the buyer actually pays.
- Random Walk
- No discernible pattern to the path that a stock price follows through time.
- Bellwether Rate
- Interest rate that serves as a leader or as a leading indicator of future trends, e.g., interest rates as a bellwether of inflation.
- Informed Trader
- An investor who makes a buy or sell decision based on public information and analysis.
- Certificate of Deposit (CD)
- Large-denomination deposits of $100,000 or more at commercial banks for a specified term.
- Noise Trader
- A trader whose trades are not based on information or meaningful financial analysis.
- Call Money Rate
- The interest rate brokerage firms pay for call money loans, which are bank loans to brokerage firms. This rate is used as the basis for customer rates on margin loans.
- Representativeness Heuristic
- Concluding that causal factors are at work behind random sequences.
- Elliott Wave Theory
- A method for predicting market direction that relies on a series of past market price swings.
- Efficient Market Hypothesis (EMH)
- The hypothesis stating that, as a practical matter, investors cannot consistently "beat the market."
- Mental Accounting
- Associating a stock with its purchase price.
- London Interbank Offered Rate (LIBOR)
- Interest rate that international banks charge one another for overnight Eurodollar loans.
- Invesment Opportunity Set
- Collection of possible risk-return combinations available from portfolios of individual assets.
- Portfolio Weight
- Percentage of a portfolio's total value invested in a particular asset.
- Efficient Portfolio
- A portfolio that offers the highest return for its level of risk.
- Yield Value of a 32nd
- Change in yield to maturity that would lead to a 1/32 change in bond price.
- Prospect Theory
- An alternative theory to classical, rational economic decision making, which emphasizes, among other things, that investors tend to behave differently when they face prospective gains and losses.
- Yield to Call (YTC)
- Measure of return that assumes a bond will be redeemed at the earliest call date.
- Make-whole Call Price
- The present value of the bond's remaining cash flows.
- Dow Theory
- A method for predicting market direction that relies on the Dow Industrial and the Dow Transportation averages.
- Bnaker's Acceptance
- A postdated check on which a bank has guaranteed payment; commonly used to finance international trade transactions.
- Price Risk
- The risk that bond prices will decrease, which arises in dedicated portfolio when the target date value of a bond or bond portfolio is not known with certainty.
- Callable Bond
- A bond is callable if the issuer can buy it back before it matures.
- Sentiment-based Risk
- A source of risk to investors above and beyond firm-specific risk and overall market risk.
- Principal of Divesification
- Spreading an investment across a number of assets will eliminate some, but not all, of the risk.
- Reinvestment Rate Risk
- The uncertainty about future or target date portfolio value that results from the need to reinvest bond coupon at yields not known in advance.
- Current Yield
- A bond's annual coupon divided by its market price.
- Even Study
- A research method designed to help study the effects of news on stock prices
- Real Interest Rates
- Interest rates adjusted for the effect of inflation, calculated as the nominal rate less the rate of inflation.
- Bank Discount Basis
- A method for quoting interst rates on money market instruments.
- January Effect
- Tendency for small stocks to have large returns in January.
- Resistence Level
- Price or level above which a stock or the market as a whole is unlikely to rise.
- Treasury Yield Curve
- A graph of Treasury yields plotted against maturities.
- Yield to Maturity (YTM)
- The discount rate that equates a bond's price with the present value of its future cash flows. Also called promised yield or just yield.
- Correlation
- The tendency of the returns on two assets to move together.
- Clustering Illusion
- Human belief that random events that occur in clusters are not really random.
- Term Structure of Interest Rates
- Relationship between time to maturity and interest rates for default-free, pure discount instruments.
- Dollar Value of an 01
- Change in a bond price resulting from a change in yield to maturity of one basis point.
- Prime Rate
- The basic interest rate on short-term loans that the largest commercial banks charge to their most creditworthy corporate customers.
- U.S. Treasury STRIPS
- Pure discount securities created by stripping coupons and principal payments of Treasury notes and bonds. Stands for Separate Trading of Registrated Interest and Principal of Securities.
- Asset Allocation
- How an investor spreads portfolio dollars among assets.
- NYSE circuit breakers
- Rules that kick in to slow or stop trading when the DJIA declines by more than a preset amount in a trading session.
- Behavioral Finance
- The area of finance dealing with the implications of investor reasoning errors on ivestment decisions and market prices.
- Forward Rate
- An expected future interest rate implied by current interest rates.
- Loss Aversion
- A reluctance to sell investments after they have fallen in value. Also known as the breakeven or disposition effect.
- U.S. Treasury Bill (T-bill)
- A short-term U.S. government debt instrument issued by the U.S. Treasury.
- Interest Rate Risk
- The possibility that changes in interest rates will result in losses in a bond's value.
- Realized Yield
- The yield actually earned or "realized" on a bond.
- Material Nonpublic Information
- Private knowledge that can substantially influence the share price of a stock.
- Excess Return
- A return in excess of that earned by other investments having the same risk.
- Coupon Rate
- A bond's annual coupon divided by its par value. Also called coupon yield or nominal yield.
- Immunization
- Construction a portfolio to minimize the uncertainty surrounding its target date value.
- Bubble
- A situation where observed prices soar for higher than fundamentals and rational analysis would suggest.
- Fisher Hypothesis
- Assertion that the general level of nominal interest rates follows the general level of inflation.
- Discount Rate
- The interest rate that the Fed offers to commercial banks for overnight reserve loans.
- Nominal Interest Rates
- Interest rates as they are normally observed and quoted, with no adjustment for inflation.
- Dynamic Immunization
- Periodic rebalancing of a dedicated bond portfolio to maintain a duration that matches the target maturity date.
- Federal Funds Rate
- Interest rate that banks charge each other for overnight loans of $1 million or more.
- Technical Analysis
- Usisng past price data and other nonfinancial data to identify future trading opportunities.
- Eurodollars
- U.S. dollar denominated deposits at a foreign branches of U.S. banks.
- Portfolio
- Group of assets such as stocks and bonds held by an investor.
- Markowitz Efficient Frontier
- The set of portfolios with the maximum return for a given standard deviation.
- Expectations Theory
- The term structure of interest rates is a reflection of financial market beliefs regarding future interest rates.
- Maturity Preference Theory
- Long-term interest rates contain a maturity premium necessary to induce lenders into making longer-term loans.
- Commercial Paper
- Short-term, unsecured debt issued by the largest corporations.
- Day-of-the-week Effect
- The tendency for Monday to have a negative average return.
- Dedicated Portifolio
- A bond portifolio created to prepare for a future cash outlay.
- Expected Return
- Average return on a risky asset expected in the future.
- Relative Strength
- A measure of the performance of one investment relative to another.
- Abnormal Returns
- The remaining return on a stock after overall market returns have been removed.
- Crash
- A situation where market prices collapse significantly and suddenly.
- Pure Discount Security
- An interest-bearing asset that makes a single payment of face value at a maturity with no payments before maturity.
- Market Segmentation Theory
- Debt markets are segmented by maturity, with the result that interest rates for various maturities are determined separately in each segment.
- Call Protection Period
- The period during which a callable bond cannot be called. Also called a call deferment period.
- Limits to Arbitrage
- The notion that the price of an asset may not equal its correct value because of barries to arbitrage.
- Duration
- A widely used measure of a bond's sensitivity to changes in bond yields.