Bond and Stock Market Key Concepts for Exam 04
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Exam 04 Review: Key Concepts
Bond Issuers
- Government (Treasury bonds)
- Corporations (Corporate bonds)
- Cities (Municipal bonds)
Bond Terminology
- Call: Issuer's ability to pay off early.
- Call Premium: Extra amount paid when calling a bond.
- Par/Face Value: Amount of debt borrowed to be repaid.
- Indenture: Bond agreement.
Asset-Backed Securities
Debt securities from other loans, e.g., credit card debt, auto loans, home equity loans.
Zero Coupon and Discount Bonds
- Zero Coupon Bond: No interest payments.
- Discount Bond: Sells below par value.
Interest Rate and Reinvestment Risk
- Interest Rate Risk: Capital loss due to interest rate changes.
- Reinvestment Risk: Future interest reinvested at lower rates.
Current Rate Calculation
Junk Bonds
Low credit quality corporate bonds.
Mortgage and Debenture Bonds
- Mortgage: Secured by real estate.
- Debenture: Unsecured bonds.
Investor Returns
Investors earn returns from both dividends and price appreciation.
Bid and Ask Prices
The difference is the spread or profit.
Stock Market Indexes
- Dow Jones Industrial Average: 30% of total stock value.
- NASDAQ Composite: Technology-focused index.
- S&P 500: 500 large companies (market capitalization).
Limit and Market Orders
- Limit Order: Buy/sell at a specific price.
- Market Order: Immediate execution at current price.
Stock Market Characteristics
- NYSE: Largest US stock exchange.
- American Stock Exchange: Trading floor, owned by NYSE.
- NASDAQ: Electronic stock market.