FIN 420 ALL CORE REVIEWS ANSWERS AND
QUESTIONS SET A+
✔✔▪ Securities Investor Protection Corporation (SIPC) - ✔✔(Look for this at your
brokerage where you are buying securities.) The SIPC is a non-profit corporation that
protects consumers if their brokerage firm fails. Currently up to $500,000 in securities is
protected including $250,000 in cash. It does not protect consumers from their personal
poor investment choices.
✔✔Yield curve - ✔✔yield against maturity for a certain bond instrument (yield %)
✔✔The Federal Reserve exercises monetary policy at the short end of the Treasury
yield curve by - ✔✔targeting a certain Federal Funds Rate (FFR). The Federal Funds
Rate is the rate that banks charge each other overnight to borrow and lend funds to
settle their accounts. The FFR is generally slightly higher than a short-term Treasury.
One way the Federal Reserve manipulates the FFR is by buying and selling Treasurys.
✔✔Loosening Monetary Policy: - ✔✔The Federal Reserve buys Treasurys which
increases the money supply and reduces the FFR. This will decrease interest rates in
the financial market.
✔✔Tightening Monetary Policy: - ✔✔The Federal Reserve sells Treasurys which
decreases the money supply and increases the FFR. This will increase interest rates in
the financial market.
✔✔A normal (positive )curve - ✔✔- is upward sloping. Investors expect a higher yield for
longer maturity bonds and will accept a lower yield for shorter maturities. This is often
an indicator that investors expect a rise in interest rates. A positive yield curve is often
observed in times of economic expansion.
✔✔A flat curve - ✔✔indicates that investors are not being compensated for additional
risk (longer maturity bonds). This is often an indication that investors believe the
business cycle is peaking and that short term rates will decrease.
, ✔✔An inverted curve indicates - ✔✔that investors are supplying more funds for longer
term securities which push the yield down for longer maturities. This is often an
indication that investors expected interest rates to decline.
✔✔A decline in interest rates indicates - ✔✔recessionary conditions. (buy treasury
securities at a long yield)
✔✔In portfolio management, cash often refers to not only actual cash but also -
✔✔instruments of high liquidity and marketability.
✔✔Liquidity - ✔✔The ability to sell an investment at a known price without a significant
loss.
✔✔Marketability - ✔✔The ability to sell an investment timely in a market, without regard
to any loss.
✔✔Cash is necessary for portfolio management to - ✔✔meet short term financial
obligations, such as expenses.
✔✔Treasurys are theoretically considered - ✔✔risk free. T-bills are one of the rare
instruments whereby a financial advisor can "guarantee" a return in a highly regulated
industry.
✔✔Discount Pricing - ✔✔- Many money market securities are sold at a discount. This
means that the borrower returns more money than it receives from the investor and
does not pay a coupon before the instrument matures.
✔✔Certificates of Deposit (CDs) --> - ✔✔▪ Issued by financial institutions to its
customers ▪ The term can be longer than one year ▪ Often a withdrawal penalty if
redeemed early
✔✔Negotiable CDs --> - ✔✔▪ Used by institutions or large investors ▪ Deposits are
generally greater than $100,000 ▪ Negotiable are CDs traded in the secondary market
✔✔Commercial Paper - ✔✔▪ Negotiable, unsecured corporate debt issued at a discount
▪ $100,000+ denominations ▪ Maturity ≤ 270 days (SEC) ▪ Backed by bank lines of credit
✔✔Banker Acceptances - ✔✔▪ Short-term drafts issued at a discount ▪ Finance imports
and exports ▪ Negotiable, unsecured line of credit
✔✔Repurchase Agreements (Repos) - ✔✔▪ Government securities dealers ▪ Short-term
liquidity needs− Sell securities to another dealer− Buy back at a higher agreed-upon
price− Fixed yield, repo rate− Short maturity, low risk ▪ Reverse repo is from the other
party's perspective
QUESTIONS SET A+
✔✔▪ Securities Investor Protection Corporation (SIPC) - ✔✔(Look for this at your
brokerage where you are buying securities.) The SIPC is a non-profit corporation that
protects consumers if their brokerage firm fails. Currently up to $500,000 in securities is
protected including $250,000 in cash. It does not protect consumers from their personal
poor investment choices.
✔✔Yield curve - ✔✔yield against maturity for a certain bond instrument (yield %)
✔✔The Federal Reserve exercises monetary policy at the short end of the Treasury
yield curve by - ✔✔targeting a certain Federal Funds Rate (FFR). The Federal Funds
Rate is the rate that banks charge each other overnight to borrow and lend funds to
settle their accounts. The FFR is generally slightly higher than a short-term Treasury.
One way the Federal Reserve manipulates the FFR is by buying and selling Treasurys.
✔✔Loosening Monetary Policy: - ✔✔The Federal Reserve buys Treasurys which
increases the money supply and reduces the FFR. This will decrease interest rates in
the financial market.
✔✔Tightening Monetary Policy: - ✔✔The Federal Reserve sells Treasurys which
decreases the money supply and increases the FFR. This will increase interest rates in
the financial market.
✔✔A normal (positive )curve - ✔✔- is upward sloping. Investors expect a higher yield for
longer maturity bonds and will accept a lower yield for shorter maturities. This is often
an indicator that investors expect a rise in interest rates. A positive yield curve is often
observed in times of economic expansion.
✔✔A flat curve - ✔✔indicates that investors are not being compensated for additional
risk (longer maturity bonds). This is often an indication that investors believe the
business cycle is peaking and that short term rates will decrease.
, ✔✔An inverted curve indicates - ✔✔that investors are supplying more funds for longer
term securities which push the yield down for longer maturities. This is often an
indication that investors expected interest rates to decline.
✔✔A decline in interest rates indicates - ✔✔recessionary conditions. (buy treasury
securities at a long yield)
✔✔In portfolio management, cash often refers to not only actual cash but also -
✔✔instruments of high liquidity and marketability.
✔✔Liquidity - ✔✔The ability to sell an investment at a known price without a significant
loss.
✔✔Marketability - ✔✔The ability to sell an investment timely in a market, without regard
to any loss.
✔✔Cash is necessary for portfolio management to - ✔✔meet short term financial
obligations, such as expenses.
✔✔Treasurys are theoretically considered - ✔✔risk free. T-bills are one of the rare
instruments whereby a financial advisor can "guarantee" a return in a highly regulated
industry.
✔✔Discount Pricing - ✔✔- Many money market securities are sold at a discount. This
means that the borrower returns more money than it receives from the investor and
does not pay a coupon before the instrument matures.
✔✔Certificates of Deposit (CDs) --> - ✔✔▪ Issued by financial institutions to its
customers ▪ The term can be longer than one year ▪ Often a withdrawal penalty if
redeemed early
✔✔Negotiable CDs --> - ✔✔▪ Used by institutions or large investors ▪ Deposits are
generally greater than $100,000 ▪ Negotiable are CDs traded in the secondary market
✔✔Commercial Paper - ✔✔▪ Negotiable, unsecured corporate debt issued at a discount
▪ $100,000+ denominations ▪ Maturity ≤ 270 days (SEC) ▪ Backed by bank lines of credit
✔✔Banker Acceptances - ✔✔▪ Short-term drafts issued at a discount ▪ Finance imports
and exports ▪ Negotiable, unsecured line of credit
✔✔Repurchase Agreements (Repos) - ✔✔▪ Government securities dealers ▪ Short-term
liquidity needs− Sell securities to another dealer− Buy back at a higher agreed-upon
price− Fixed yield, repo rate− Short maturity, low risk ▪ Reverse repo is from the other
party's perspective
