Chap 2 Flashcards
Money market
subsector of fixed income market
short-term, high-liquid and low risk debt instruments
US Treasury bills
sold by government to public investors -> raise funds at discount rate
Highly liquid
Incomes from T-bills are exempted from taxes and local taxes
Specified securities of Money Market
- Treasury bill
- Certificates of Deposit
- Commercial paper
- Banker’s acceptance
- Eurodollars
- Repos and Reserves
- Brokers call
- Federal funds
Ask price
Price dealer willing to sell
Bid price
Price dealer willing to purchase
bid-ask spread
difference between bid and ask price
bank-discount method
bill’s discount from its maturity
360 days
% of face value
Asked yield (bond yield equivalent)
yield that investor makes when hold bill until maturity
Certificate of Deposit (CD)
time deposit with a bank
cannot be withdrawn on demand and only get paid interest
only get principal at the end
Commercial paper (CP)
short term unsecured debt
issued by large corporation
Maturity: 1-2monts
traded in secondary market, quite liquid
Banker acceptance
an order to a bank to pay a sum of money at a future date (6 months)
“accepted” -> banks are responsible for paying the holders of the acceptance
can be traded in secondary market
Eurodollars
dollar denominated time deposits at a foreign bank, not necessarily EU banks
eurodollar deposits are for large bank, around 6 months
Repos
- Repurchase agreements
- short-term sales of securities with an agreement to repurchase the securities at a higher price
- safe on term of credit risk
- act as collateral if the borrower defaults.
reverse repo
- mirror image of repo
broker’s call
- individuals buying stocks on margin borrow part of the funds to pay for the stocks from their broker
- rates paid are around 1% higher than rate on short term T-bills
Federal funds
funds in the accounts of commercial bank at Federal Reverse Bank
- Fed funds rate commands great interest as key barometer of monetary policy
LIBOR market (London interbank offer rate)
- Rate large banks in London are willing to lend money among themselves, serving as the benchmark for financial contracts
EUIBOR
similar to LIBOR but in eurozone
Money market securities’s yields
Low risk but not risk free -> higher yields than T-bill
Specified securities of Bonds Market
- Treasury bonds and notes
- Federal agency debt
- Municipal bonds
- Corporate bonds
- Mortage-backed securities
Specified securities of Equity Market
- common stocks
- preferred stocks
Specified securities of Derivatives Market
- Options
- Futures and forwards
- Swaps
Indexes
- Dow Jones averages
- Standard and poor
- Bond market indicators
- International indexes
Bond markets
longer term
sometimes called fixed income capital market
Treasury notes and bonds
- debt obligations of federal government with original maturity for 1 year
- semi annual payment
Yield to maturity
calculated by determining semi annual yield then doubling it
inflation protected treasury bond
bonds issued by government, provide citizens hedge from inflation rate
federal agency debt
government issues their own securities -> finance their own debts
agencies are formed to channel credit to a particular sector of the economy
international bonds
Eurobonds/international bonds: bonds denominated by the currency of other countries from the country it is issued
municipal bonds
bonds issued by state and local government
exempted form federal income taxations
2 types of municipal bonds
- General obligation bonds: backed by “full faith and credit” of issuer
- revenue bonds: issued to finance commercial enterprises; backed by the revenues from a given project or by the municipal agency operating the project.
when compare
after tax return and tax exempt bonds
What is the yield ratio for municipal bonds? (r[taxable])
r[muni] / r[taxable] = Yield ratio
Tax bracket
1 - r[muni] / r[taxable]
whether to hold taxable debt or municipal debt?
1 > r[taxable] > 0: Hold taxable debt
r[taxable] > 1: hold municipal debt
Corporate bonds
private firms borrow money directly from public using corporate bonds
paying semi annual coupons during bond’s lives and return face value at maturity
types of corporate bonds
5 types:
- secured bonds
- subordinated debentures
- debentures
- callable bonds
- convertible bonds
Callable bonds
Bonds that give the firm the option to repurchase the bond from the holder at a stipulated call price.
Convertible bonds
give the bond holder the option to convert each both into a stipulated number of shares of stock.
Mortgage backed securities
- ownership claims a pool of mortgage / an obligation secured by a pool
conforming mortgage
loans that satisfy certain underwriting guidelines
subprime mortgage
riskier loans made to financially weaker borrowers, make housing more affordable
common stocks/equities
ownership shares in a corporation, entitles to 1 vote
proxy vote
shareholders who cant attend the annual meeting can vote by proxy
characteristics of common stocks
- Residual claims: stockholders are last in line in event of liquidating
- Limited liability: not personally liable for firm’s obligation
Listings of stocks
comparison table with certain information highlights key info
Price to earning ratio (PE Ratio)
ratio of current stock price to last year earnings per share
Preferred stocks
- promise to pay stockholders fixed income; doesnt convery to voting power
- pay dividends to stockholders
treated as dividends more than interest -> not tax-deductible
Dow jones average
performance of 30 large, blue-chop in US since 1986
