Chaoter 9 - Bond And Money Markets Flashcards
Types of cash on deposit instruments
Call deposits
Notice deposits
Term deposits
Types of money market instruments
Treasury bills
Local authority bills
Bills of exchange and commercial paper
The main players in the market
Clearing banks
Central banks
Other financial institutions
Investment and risk characteristics of cash on deposit and money market instruments
Good security, short term, depened on borrower
Return through income
Income has loose direct link with inflatiron
Lower expected returns than equities and bond over long term
Stable market values
Short term
Low dealing expenses
Normally highly marketable
Return normally taxed as income
Reasons for holding cash on deposit and money market instruments
Meet short term commitments Outgo is uncertain Ready to take advantage of investment opportunities Awaiting investment Protect monetary value of assets
Reasons for holding cash on deposit and money arket instruments
Pessimistic about
Rising interest rates
Economic recession
Domestic currency weakening
General economic uncertainty
Bonds
Fixed interest or index linked
Bond markets
Government bonds
Corporate bonds
Overseas bonds
Fixed interest bonds
Good security Yield is fixed in nominal terms Lower expected return than equities Market values volatile Mixture of terms Low dealing expenses Highly marketable
Index linked bonds
Linked to inflation index
Nominal yield on a fixed interest government bond
NY = rf real yield + E(future inflation) + inflation risk premium
Relative attractiveness of fixed interest and index linked bonds
Future inflation lower than implied means fixed interest bonds more attractive and vice versa