Bond And Money Market Flashcards
Characteristics of an investment
SYSTEM T
- Security - default risk
*default prob
*reputation - Yield - real/nominal expected return
2.1real/nom
*Risk
*fixed vs variable vs linked
*reinvestment
*mid - term sale
*uncertain real return
2.2 expected return
*Risk vs return - Spread- volatility of market values
- Term - short medium long
- Expenses/exchange rate
*currency risk - Marketability
*ability to buy and sell - Tax
?what is the institution are they exempt
*income.and capital gains
Common investment classes
- Cash on deposit
- Money market
- Fixed interest
- Index-linked interest
- Equity
- Property
Cash on deposit
- Call deposit
- Notice deposit
- Term deposit
Clearing banks role
Liquidity
*lend excess cash to them
*borrow when low on cash
Central bank
- Lenders of last resort
- Use operations to establish level of short term interest rates
- Sale or purchase of treasury and other bills
- Provide liquidity to banking system
Money market -reasons for holding cash (liquidity)
A SOUP
1. Awaiting to invest after receiving cashflow
2. Short term commitments
3. Take advantage of investment opportunities
4. Prepared for uncertain outgo
*general insurance
5. Protect monetary value
*Risk aversion
Money market - reasons to hold cash
- Liquidity
- Poor economic outlook
Money market - reasons to hold cash (economic outlook)
GRID
1. Genral economic uncertainty
2. Economic recession
*lower growth
*increasing government deficit
3. Rising interest
*depress both bond and equity markets
*attractive for investment
4. Weakening domestic currency
*makes international investments attractive
Distinct types of bond markets
- Government
- Corporate
- Overseas
Fixed interest bond definition
Aka conventional bond
Gives income stream and final redemption proceeds that are fixed in monetary terms
Index linked bond definition
Gives income stream and final redemption value that is linked to an inflation index
