The ABC's of Finance

Financial assets: those that are expected to produce, based in the behavior of another institution or persons.

Financial institutions: those whose majority of assets are financial assets.

Deposit institutions: commercial banks, savings and loan banks, cooperatives, etc. They traditionally emphasize deposits.

Financial markets: money markets and capital markets.

Money market: that in which investments have maturity dates of a year or less. In this type of market you will find "Treasury Bills", "Repos", "Commercial Paper", "Bankers Acceptances", "Certificates of Deposit (Cds", etc.

Treasury bills: short term debt emissions of the United States Government. They generally have a maturity date of 91, 182 and 364 days.

Repurchase/reverse agreements (Repos): transactions in which the seller of financial instruments vows to buy them again at a given date and price.

Commercial paper: short term loans of businesses in the money market. They are bought at a discount and have a duration of less than 9 months.

Bankers acceptances: short term credit agreements to finance exports.

Certificates of deposit: intermediate cash flow banking instruments.

Capital market: investments with maturity over one year, such as Treasury Notes, Bonds, Eurobonds,, common stocks, preferred stocks, etc.

Coupon bonds: debt instruments issued by the United States Treasury, by Federal Loan Banks, foreign governments, and others. An initial price is paid and, upon maturity, the total sum is redeemed with accrued interests.

Bonds bought at a discount: those that pay a lower interest than the current market.

Bonds bought at par: those that pay interests equal to those in the market.

Bonds bought with a premium: those that pay an interest rate higher than the market.

Eurobonds: originally defined as bonds issued in dollars outside of the United States. Now they include bonds emitted outside of the issuing country and bought by investors not residing in the country.

Mortgages: debt instruments that have a property as collateral.

Preferred stocks: those that pay a fixed interest and are not debt instruments.

Common stocks: those in which owner receives dividends and has a right to vote.

Fischer effect: when the nominal interest rate reflects the real interest rate plus a payment based on the expected inflation rate.

Interest rate risk: possible variation in the yield of an investment.,

Price yield ratio: at higher prices, less yield, and at lower prices, higher yield.

Duration: represents the real time for the recuperation of an investment.

Portfolio immunization: when the duration is equal to the planned time of holding an investment.

Futures contract: an agreement to buy or sell a specific merchandise at a set price at a specified future time.

Hedging: generally used by financial institutions to lower the risk. Used to diminish possible losses due to movements in interest rates or exchange rates.

Long hedge: utilized when a lowering of interest rates is expected or in the currency exchange rate and future contracts are bought.

Short hedge: when interest rates or exchange rates are expected to increase, and future contracts are sold.