Master this deck with 25 terms through effective study methods.
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Greenmail is a strategy where a company pays off an acquirer to avoid a hostile takeover. Companies use it to maintain control and protect their interests from unwanted acquisitions.
A Straddle involves buying one call option and one put option for the same stock, with the same exercise price and expiration date. It is used when an investor expects significant price movement but is uncertain about the direction.
A Strip consists of two put options and one call option for the same stock, with the same exercise price and expiration date. It is used when an investor expects a significant downward movement in the stock price.
A Strap is an options strategy that involves buying two call options and one put option for the same stock, with the same exercise price and expiration date. It is used when an investor anticipates a significant upward price movement.
A Spread refers to the simultaneous buying and selling of options on the same underlying asset, differing in terms of time, exercise price, or expiration date. It is used to limit risk and enhance potential returns.
Duration is a measure of a bond's price sensitivity to changes in interest rates, expressed in years. It indicates how much the price of a bond is expected to change with a 1% change in interest rates.
Horizon refers to the length of time an investor expects to hold an investment before liquidating it. It influences investment choices and risk tolerance.
Immunization is a strategy to protect a portfolio from interest rate risk by matching the duration of assets and liabilities, ensuring that the portfolio's value remains stable despite interest rate fluctuations.
Convexity measures the curvature in the relationship between a bond's price and changes in interest rates. It accounts for non-linear price movements, providing a more accurate assessment of interest rate risk.
Agency Bonds are debt securities issued by government-sponsored entities or federal agencies, often with implied government backing. They typically offer lower yields compared to corporate bonds due to their perceived safety.
Discount Interest is interest that is deducted from the loan amount at the start, resulting in a lower initial loan disbursement. This affects the total amount the borrower receives upfront.
Ordinary Interest is calculated on the full principal balance of a loan. It impacts the total interest paid over the life of the loan, as it does not account for any reductions in principal.
Bond Swapping involves replacing one bond with another to achieve better returns or tax advantages. Investors may engage in it to optimize their portfolios based on changing market conditions.
A Substitution Swap involves swapping similar bonds to improve yields. It is used by investors to enhance returns while maintaining a similar risk profile.
An Intermarket Spread Swap involves swapping bonds from different markets to exploit price differences, such as between treasuries and corporate bonds, aiming for profit from market inefficiencies.
A Rate Anticipation Swap is a strategy where investors swap bonds based on expected changes in interest rates, allowing them to capitalize on anticipated market movements.
Pure Yield Pickup refers to the strategy of swapping for higher-yielding bonds. It benefits investors by increasing their income without significantly altering their risk exposure.
The Liquidity Preference Theory posits that investors prefer short-term bonds due to lower risk. This preference influences interest rates and the yield curve, as investors demand higher yields for longer maturities.
The Expectations Theory suggests that long-term interest rates reflect expectations of future short-term rates. It implies that the yield curve can indicate market expectations about future economic conditions.
Preferred Habitat Theory posits that investors have specific maturity preferences based on their needs. This theory explains why certain maturities may have different yields, reflecting investor demand.
A Call Option is a contract that allows the buyer to purchase an asset at a set price before a specified date. It provides the buyer with the right, but not the obligation, to buy the underlying asset.
A Put Option is a contract that allows the buyer to sell an asset at a set price before a specified date. It serves as a hedge against declining asset prices, providing downside protection.
The Strike Price is the price at which the option holder can buy (call) or sell (put) the underlying asset. It is crucial for determining the profitability of the option at expiration.
The OCC facilitates the clearing and settlement of options trades, ensuring that transactions are processed efficiently and that both buyers and sellers fulfill their obligations.
An option is In the Money when exercising it is profitable (e.g., for a call, stock price > strike price). It is At the Money when the strike price equals the current market price, and Out of the Money when exercising it would not be profitable.