ASSET CLASSES Flashcards
What is the difference between the Money Market and the Bond Market?
The Money Market is a subsection of the fixed-income market that trades with very short-term debt securities (<1 year) that tend to be very marketable. The Bond Market deals with long-term debt securities (sometimes called fixed-income instruments)
What securities are traded in the Money Market?
T-bills, BTF (Bonds du Trésor à taux fixe et à intérêts précomptés), short-term CDs (certificates of deposit), commercial papers, repos and reversed repos (repurchase agreements)
What securities are traded in the Bond Market?
- Treasury notes
- Treasury bonds
(fungible t-bonds = OATs)
(TIPS = Inflation-Protected Treasury Bonds) - Corporate bonds
- Municipal bonds
- Mortgage securities
What is a commercial paper?
Short-term unsecured debt notes (no collateral) issued by large companies to raise funds
Maturity up to 270 days but usually 1-2 months
Issued in multiples of $100000 (small investors only through money market mutual funds)
Considered safe (firm’s condition easily predicted over short timespan)
Who issues commercial papers?
Usually nonfinancial institutions but @ the start of the 2000’s financial institutions (banks) began issuing “asset backed” commercial papers en masse
What are asset backed commercial papers?
Short-term commercial papers used to raise funds for the issuer to invest in other assets (subprime mortgages), which are then used as collateral for the paper.
(crisis 2008: subprime borrowers defaulted and the banks couldn’t issue new papers to refund)
What is a CD?
Certificate of Deposit: time deposit @ the bank that can’t be withdrawn on demand, principal and interest paid back only @ end of convened period
CDs > $100000 can be sold to another investor if the owner needs to cash in before its maturity date.
Short-term CDs: highly marketable, for maturity <= 3 months
They are insured up to $250,000 in case of bank insolvency.
What is a T-bill?
*Most marketable of all money market instruments
*Simplest form of borrowing
*Gov sells bills to raise money: investors buy them @ a discount from the stated maturity value (face value + coupon)
*Purchase Price - maturity value = investor earnings
*Highly liquid: low transaction cost without much price risk
What are the usual maturities for T-bills?
4, 13, 26, 52 weeks
Where to purchase T-bills?
- Directly at auction
- Secondary market from a
government securities dealer
What’s the ISIN?
12 alphanumeric character code used to identify securities traded internationally
What’s the CUSIP?
9 alphanumeric character code used to identify securities traded in NA
What’s BTF
Bons du Trésor à taux fixe et à intérêts précomptés/negotiable fixed-rate discount
Treasury bills
French government’s cash management instrument (French T-bills)
What are BTFs used for?
Smoothing out fluctuations in the gov’s cash position over the year, usually due to lags in revenue collection or expenditure
disbursement, as well as from the debt redemption schedule
BTF auction and maturity
Auctioned every Monday, with maturity < 1 year. Quarterly BTF auction schedule is published in advance (Friday) and specifies the maturities issued at each auction.
BTF characteristics?
Bids starting at 1M € are made at post-counted rates (buyer pays market price + accrued interests) => ACT/360
There is no coupon payment, as they carry withheld interests (discount rate calculated proportionally to maturity) deducted from the purchase price
What’s the ECB’s goal?
Keep price stability, keep inflation around (under) 2%
What’s LIBOR?
Rate @ which large London banks trade amongst themselves
Was a key benchmark for setting the interest rates charged on adjustable-rate loans, mortgages, and corporate debt. It was used to price adjustable-rate mortgages, asset-backed securities, municipal bonds, credit default swaps, private student loans, and other types of debt.
LIBOR (London Interbank Offered Rate) methodology?
Designed to produce an average rate representative of rates at which large international banks could fund themselves
Calculated for 5 currencies: EUR, USD, GBP, CHF, JPY; & 7 tenors in each currency: Overnight/Spot Next, 1 Week, 1 Month, 2 Months, 3 Months, 6 Months and 12 Months
=> 35 rates published (1 for each combo)
LIBOR Replacement
It is being replaced in the US by the Secured Overnight Financing Rate (SOFR), which many experts consider a more accurate and more secure pricing benchmark.
In the UK, SONIA (Sterling Overnight Index Average) is replacing LIBOR as the industry standard sterling benchmark reference rate on 1 January 2022.
1-month, 3-month, 6-month, and 12-month maturities will
continue to be published through June 2023
US Market
US gov raises funds mostly through treasury notes and bonds
T-notes are issued with maturities ranging up to 10 years
T-bonds are issued with maturities ranging from 10 to 30 years.
Commonly trade in denomination of a $1000
Semi-annual interest payments: coupons
AFT
Agence France Trésor: manage State cash requirements
AFT is tasked with managing debt in the taxpayers’ best interest. Its strategy takes a longterm view, while tracking the market closely. This strategy promotes liquidity across the full range of AFT’s debt securities, while maintaining full transparency and a commitment to combining innovation and security.
Why do investors have an easier access to the FR government securities market?
The French government has simplified and standardised its securities to ensure a highly liquid market for its securities, enabling investors to buy and sell promptly and for a
reasonable cost at any time
=> 2 standard Treasury securities: BTF and OATs
What is OAT?
Obligations assimilables du Trésor: used for the
government’s medium- and long-term borrowing
Maturity: 2-50 years; fixed coupon redeemed at maturity
Auctions of long-term OATs are held on the first Thursday of each month. The government uses these auctions to sell OATs with maturities of 8.5 years and more. Auctions are also held on the third Thursday of each month to sell medium-term OATs, with maturities ranging from two to eight years, and index-linked OATs (OATi, OAT€i issues).
What are Inflation-Protected Treasury Bonds?
They provide a constant stream of income in real (inflation-adjusted) dollars. TIPS (Treasury Inflation
Protected Securities) is adjuted to the Consumer Price Index
What are Corporate Bonds?
Corporate bonds are the means by which private firms borrow money directly from the public.
Pay semi-annual coupons and return principal at maturity.
Unlike Treasury Bonds, Default risk is a real concern
They sometimes come with options attached (call-options and convertible bonds)
What are Mortgage-Backed Securities?
A MBS is either an ownership claim in a pool of mortgages or an obligation that is secured by such a pool. It’s an investment similar to a bond that is made up of a bundle of home loans bought from the banks that issued them. Investors in MBS receive periodic payments similar to bond coupon payments.
What assets yield semi-annual coupons?
- Corporate bonds
- T-bonds and T-notes
What are repos?
Repurchase agreements:
The dealer sells government securities to an investor on an overnight basis, with an agreement to buy back those securities the next day at a slightly higher price.
The dealer sells government securities to an investor on an overnight basis, with an agreement to buy back those securities the next day at a slightly higher price.
Very safe from credit risk: backed by government securities
What are reverse repos?
A reverse repo is the mirror image of a repo. Here, the dealer finds an investor holding government securities and buys them, agreeing to sell them back at a specified higher price on a future date.
When are OAT coupons yielded?
Annually
