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Financial markets and institutions > Chapters 6-8 - up to midterm > Flashcards

Chapters 6-8 - up to midterm Flashcards

1
Q

money markets securities

A

debt securities with a maturity of one year or less

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2
Q

treasury bills

A
  • minimum is $1,000, in multiples of 1000
  • don’t offer interest, instead at a discount to par
  • maturity is 1 year or less
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3
Q

bond equivalent yield =

A

((sale price - buy price) / buy price) * 365 / n

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4
Q

discount =

A

((par - buy price) / par) * 360 / n

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5
Q

commercial paper

A
  • short-term debt issued by creditworthy financial institutions and corporations
  • minimum of $100,000 ay a discount to par
  • all mature in 270 days or less
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6
Q

certificates of deposits

A
  • Certificates issued by large commercial banks and other depository institutions as a short-term source of funds
  • minimum is $100,000
  • maturity is 2 weeks - 1 year
  • issued at par, pay interest
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7
Q

repurchase agreements

A
  • collateralized loan
  • One party sells securities to another with an agreement to repurchase the securities at a specified date and price
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8
Q

federal funds

A
  • Enable depository institutions to lend or borrow short-term funds from each other at or around the federal funds rate
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9
Q

banker’s acceptances

A
  • Indicates that a bank accepts responsibility or a future payment
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10
Q

required rate of return =

A

= risk free rate + risk premium

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11
Q

market price =

A

= par / (1 + k)^n
- k = EAR
- n = time to maturity / 365

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12
Q

money market mutual funds

A
  • Extremely common as cash alternative(cash equivalent)
  • Important intermediary between both institutional and individual investors and the money markets generally invested in short term/safe investments
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13
Q

Eurodollars

A
  • US dollar denominated deposits at foreign banks of overseas branches of American banks
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14
Q

bonds

A
  • a security that represents a long-term loan of money to a company/government entity
  • maturity > 1 year
  • interest payments + par at maturity
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15
Q

stock market

A
  • equity shares of publicly owned companies
  • $44T market size
  • $506B daily volume
  • 5,284 securities
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16
Q

bond market

A
  • $53T market size
  • $1T daily volume
  • 1,197,000 securities
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17
Q

US treasury bonds

A

Various maturities, minimal risk, interest exempt from state and local income taxes

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18
Q

municipal bonds

A
  • Issued by a state/local government
  • Interest on a majority are exempt from federal income tax and usually state/local income taxes if the investor lives in the state of issuance
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19
Q

corporate bonds

A
  • Issued in denominations of $1,000, semiannual interest payments
  • Maturity varies but is generally 2-30 years
  • Category is generally split between financial and non-financial issuers
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20
Q

secured bond

A

the issuer has pledged specific assets or future cash flows as collateral

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21
Q

senior bond

A

has the right to be repaid ahead of subordinate debt holders

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22
Q

general obligation municipal bonds

A

backed by the revenue generating capacity(taxes) of the municipality

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23
Q

TIPS

A
  • treasury inflation-protected securities
  • adjust the principal amount the securities for the inflation rate
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24
Q

what represents the risk free rate?

A

a US treasury bond of the same maturity

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25
Q

high yield(junk) bonds

A

rated as “non-investment grade” by the rating agencies representing a higher potential for default

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26
Q

fallen angels

A
  • Investment grade bonds that are downgraded to high yield
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27
Q

rising stars

A

bonds that are upgraded to investment grade

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28
Q

clean price

A

dealer prices will exclude accrued interest from the previous coupon date

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29
Q

dirty price

A

the actual amount that will exchange hands will be quoted + the accrued interest

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30
Q

treasury note maturity

A

1-10 years

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31
Q

treasury bond maturity

A

> 10 years

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32
Q

competitive bids

A

specify a price and a dollar amount of securities to be purchased

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33
Q

non-competitive bids

A

only specify a dollar amount of securities to be purchased

34
Q

STRIPS

A
  • separate trading or registered interest and principal of securities
  • cash flows are transformed(stripped) by securities forms to create principal/interest only bonds
35
Q

federal agency bonds

A

issued by federal agencies who use the proceeds to purchase mortgages in the secondary market

36
Q

what are the 2 “government sponsored agencies”?

A

Fannie Mae and Freddie Mac

37
Q

indenture

A

legal document specifying the rights and obligations of the issuing forms and the bondholder

38
Q

trustee

A

by law, is appointed to ensure the issuer complies with the indenture

39
Q

firm commitment

A

the underwriter guarantees the issue that all bonds will be sold at a specified price

40
Q

best efforts arrangement

A

the underwriter attempts to sell the bonds at a specified price, with no guarantee

41
Q

sinking fund provision

A

requires the firm to pay a price above par value when it calls its bonds

42
Q

call premium

A

the difference between the bond’s call price and par value

43
Q

debt-for-equity-swap

A

corporations issue bonds and then use the proceeds to repurchase some of their existing stock

44
Q

CDOs

A
  • collateralized debt obligation
  • corporate bonds packaged by commercial banks
45
Q

how is the value of a bonds determined?

A

by the present value of its expected future cash flows

46
Q

yield to maturity

A

the annualized return on a bond, based on the current purchase price and assuming that you hold the bond to maturity, receive all promised cash flows from the date of purchase, and reinvest annual payments at te same rate

47
Q

discount rate

A

the yield that could be earned on an alternative investment with similar risk and maturity

48
Q

what will cause a bond price to drop?

A

of the market rate of interest is higher than the coupon payments

49
Q

par bonds

A
  • bonds selling at par
  • If coupon rate equals the required rate, the price of the bond = par value
50
Q

discount bonds

A
  • bonds selling below par
  • If coupon rate is below required rate, the price of the bond is below par
51
Q

premium bonds

A
  • bonds selling above par
  • If coupon rate is above the required rate the price of the bond is abvoe par
52
Q

factors influencing the risk-free-rate

A
  • inflation
  • economic growth
  • money supply
  • budget deficit
53
Q

how does inflation impact the risk free rate?

A
  • If inflation is expected to increase, there will be an upward pressure on interest rates and on the RROR
  • Anticipated federal reserve policy
  • Exchange rate movements
54
Q

how does economic growth impact the risk free rate?

A

Strong economic growth tends to generate upward pressure on interest rates

55
Q

how does the money supply impact the risk free rate?

A
  • Increase in the money supply may result in an increased supply of loanable funds
  • The increase money supply should place downward pressure on interest rates
56
Q

how does the budget deficit impact the risk free rate?

A

An increase in the budget deficit can put upward pressure on interest rates

57
Q

systemic factors

A
  • factors the impact all issuers
  • e.x. the expectation for economic growth
58
Q

idiosyncratic factors

A
  • factors specific to a single issuer
  • e.x. industry, customer base, or geography
59
Q

bond price elasticity

A

The sensitivity of bond prices(Pb) to changes in th required rate of return(k)

60
Q

Pbe =

A

% change in Pb / % change in k
- Pb = bond price
- k = RROR

61
Q

what bond is most sensitive to changes in the required ROR?

A
  • zero-coupon bonds
  • because the discount is applied to a lump sum at maturity
62
Q

what is the relationship between tome to maturity and sensitivity to IR changes?

A

direct relationship

63
Q

duration

A

measurement of the life of the bond on a PV basis

64
Q

what is the duration on a zero coupon bond?

A

equal to term to maturity

65
Q

how do you find the duration of a portfolio of bonds?

A

the WA of the bond dratins weighted according to their relative MV

66
Q

modified duration(DUR*)

A

estimates the impact of a change in the k(current bond yields) on the price of the bond

67
Q

expected change in price =

A

(-)modified duration x change in yield

68
Q

convexity

A

the slope of the price versus yield relationships

69
Q

convexity is more pronounced when?

A

bonds have:
- longer maturities
- low or no coupons
- uncertain cash flows and mortgages

70
Q

DUR* =

A

duration / (1 + k)

71
Q

DV01 =

A

dollar value of a bond’s price change for a 1 basis point change in rate (Δ)

72
Q

CV01 =

A

dollar value of a bond’s price change for a 1 basis point change in credit spread

73
Q

value at risk =

A

downside risk for financial instruments based on a statistical level of confidence assuming a “business as usual” environment

74
Q

stressed value at risk =

A

downside risk for financial instruments based on statistical level of confidence during a stressed market environment

75
Q

matching strategy

A

The investor knows/estimates future cashflows and develops a bond portfolio that can generate sufficient coupon or principal payments to cover those outflow

76
Q

laddered strategy

A

Investing an even allocation across maturity types

77
Q

barbell strategy

A

Funds are allocated to bonds with a short term to maturity as well as to bonds with a long term to maturity with little allocation elsewhere

78
Q

interest rate strategy

A

funds are allocated in a manner that capitalizes on interest rate forecasts

79
Q

what do government bonds offer?

A
  • low(er) risk, generally don’t worry about credit
  • good way to invest with an interest rate strategy
80
Q

what do municipal bonds offer?

A
  • tax sensitive
  • low(ish) risk, slightly more yield
81
Q

what do agency bonds offer?

A
  • Greate way to invest with interest rate forecasts
  • low(ish) risk, slightly more yield
82
Q

what do corporate bonds offer?

A
  • Return seeking investors
  • Investing based on credit and interest rate forecasts

Financial markets and institutions (8 decks)

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