Exam 1 - Chapter 2 [Slides] Flashcards
Asset Classes
Debt
- Short term are placed in what type of markets
Money Markets
Asset classes
- Debt
What is long-term debt stored in (What market)
Capital
What are the two Asset Classes
Debt
- Short- term & Long-term
Equity/Stock
Who has Treasury Bills?
Federal Government
Who has Certificates of Deposit
Commercial Banks
Who has Commercial Paper?
Corporations -> Only high level corporations
Who has Bankers’ Acceptances
Post dated check -> guarantee by commercial banks
Who has Eurodollars
Dollar denominated time deposit in foreign countries
Foreign countries keyword
- It’s a time deposit
Who has Repurchase Agreement (Repos)
Collaterized short-term debt
Who has Broker’s Calls
Margin loan
Who has Federal funds
Loan for reserve requirement
Is Repurchase Agreement short-term or long-term?
Short-term
Treasury Bills
- Issued by?
Federal Government
Treasury Bills
- Denominations?
$100, commonly $10,000
Treasury Bills
- Maturity
4, 13, 26, or 52 weeks
Treasury Bills
- Liquidity (high or low)
Highly liquid
Treasury Bills
- Is there a Default risk?
None
Treasury Bills
- Quoted in?
Discount
Treasury Bills
- Is there taxation?
No, Federal taxes owed, exempt from state and local taxes
Commercial Paper
- Issued by?
Large creditworthy corporations and financial institutions
Commercial Paper
- Maturity?
Maximum 270 days, usually 1 to 2 months
Commercial Paper
- Denomination
Minimum $100,000
Commercial Paper
- Liquidity?
3 months or less are liquid if marketable
Commercial Paper
- Default risk
Unsecured, Rated, Mostly high quality
Commercial Paper
- Quoted in
Discount
Commercial Paper
- Taxation
Interest income is fully taxable
Bankers Acceptance
- Originates when a purchaser of goods authorizes its bank to pay the seller for the goods at a date in the future ( a draft is used like a post dated check)
- When the purchaser’s bank agrees to “accept” the draft it becomes a contingent liability of th bank and becomes a marketable security
What is Eurodollars
- Dollar denominated (time) deposits held outside the U.S
- Usually pay a higher interest rate than U.S. deposit
Are yields on money markets s instruments always comparable?
No, because they use different price Quotations methods: Discount or BEY?
What are the 2 factors to consider for yield calculation?
- Par Value vs. Investment Value
2. Quotes may use different day count convention (360 vs 365 days in a year)
What do they treat 1 year as in days
360 days
1% point is ____ bases point
100
What is .05 is ____ bases point
50
What is the actual discount formula?
Discount rate x How many days / 360 x Suppose par value
What cant you compare directly to bond Yield?
Why?
T-bill
- because the discount rate is not a yield
What are the two ways for Quoting is ?
1 . Bond Equivalent Yield
2. Discount Rate
What is the difference between Treasury Bonds and Notes?
Maturity
What are the 5 Long-term Debt Instruments
- Treasury Bonds/Notes
- Government-Sponsored Agency issues
- Municipal bonds
- Corporate Bonds
- Eurobonds
What is most common
Semi annual
Annually
Quarterly
Semiannual
What is a premium bond
Par value is more than bond price
Federal Agency/ Government Sponsored Enterprise Issues
What majority debts they issue?
Home mortgage related debts
What are MBS Also issued by
Subsidiaries of Investment Banks
What is CMO also called?
Derivatives security
What is Munis
Municipal Bonds
Does Municipal Bond have Default Risk
Yes
Are Municipal Bonds have Taxation
They are tax exempt from Federal Income Tax
What is Marginal Tax rate also called?
Tax Bracket
Debt that isn’t security is called?
Debenture
Why is it called Security Debenture
Since its backed by something
What are the 3 bond rating service companies
Standard and poor
Moodys
Fitch
Eurobonds:
Foreign currency-denominated bonds issued by the foreign companies
What are the most popular Eurobonds?
Euro dollar bonds & Euro yen bonds
Foreign bonds:
Domestic currency-denominated bonds issued by the foreign companies
What are example of foreign bonds
Yankee, Samurai, Arirang, Bulldog bonds
What is equity also called?
Equity
4 things in common stock
- Residual claim
- limited liability
- preemptive rights
- voting rights
Preemptive rights
Stock owner as a owner whenever is there a new issues of common stock the existing shareholder has the right to buy first
Votings right
Annual meeting an elect directors
What’s different between common stock and preferred stock
Common stock - Dividend vary over time
Preferred stock - dividend is fixed
Who has priority preferred or common stock?
Preferred
What’s the drawback of preferred stock?
Double taxation
What doesnt preferred stock have compared to common stock?
Voting rights
Preferred stock
- Corporate tax exclusion on ___% dividend earned
70%
What are the uses of Stock and Bond Indexes
- Track market average returns
- Comparing performance of Portfolio managers
- Reflect overall market perception on economic status in the foreseeable future
Factors in constructing or using an index
Representative
Broad or narrow
How is it constructed
To construct an equity index, we need to determine 2 things
What stocks to include
What weighting schemes to use
Equally weighted index
Portfolio index where the same amount of $ in each stock are invested
Market Value Weighted Index
Portfolio Index where $ amounts invested in each stock are proportional to the market value of outstanding shares (market cap size) of each stock
Price Weighted Index
It is a portfolio index in which one share of each stock is included
