Exam 3 Flashcards
Money Market Instruments (Less than one year)
T-Bills, Federal Funds, Repurchase Agreements, Commercial Paper, Negotiable CD, Bankers Acceptances
Capital Market Instruments
Treasury Bonds, Gov’t Agency Bonds, Corporate Bonds, State and Local Bonds, Mortgages, Mortgage-backed Securities, Corporate Stocks
Price Risk
Risk that asset’s sales price will be lower than its purchase price
Types of Shadow Banking
SIVs, SPVs, Credit Hedge Funds, Asset-Backed Commercial Paper
Similarity between shadow and traditional banking
Facilitate flow of funds between savers and borrowers
Loanable Funds Theory
Interest rates will be determined by supply and demand for funds
Term Structure of Interest Rates
Comparison of market yields on securities, assuming all characteristics except maturity are the same
Market Risk
Risk of loss caused by adverse price movements
Unbiased Expectations Theory
The yield curve reflects the market’s current expectations on future short-term rates
Market Segmentation Theory
Argues that financial institutions and individual investors must be encouraged to take on more risk than their most preferred rate by higher interest rates
Forward Rate
Expected or implied rate
Coupon rate
Determines dollar amount of interest paid to bondholders
3 main issuers of bonds
Treasury, corporate, municipal
Interest Rate Risk
Risk that when interest rates change substantially, bondholders experience distinct gains and losses in their bond investments
Current Yield Formula
Annual Coupon Rate/Bond’s Current Market Price
Advantage of municipal bonds
Tax exempt
Do yield spreads change over time?
Yes
Do short or long term bonds have more interest rate risk?
Long
Where does trading at physical exchanges take place?
Brokers’ trading posts
Characteristics of NASDAQ
Electronic market, 2nd behind NYSE, Lists approximately 3900 domestic and foreign companies
Dividend Yield
Last four quarters of income expressed as percentage of stock price
Formula for Market Capitalization
Current Stock Price times Number of Shares Outstanding
