Lecture 3

Question 1

What is an asset backed security?

Answer 1

When FIs lend money to borrowers to purchase a specific asset. FIs sell loans to people wishing to make income stream, home can be seized as collateral.

Question 2

How do FIs make money on security backed loans?

Answer 2

By charging commissions to borrowers and investors.

Question 3

“Globally, bonds account for nearly ____ as much investment as equities.

Answer 3

“Globally, bonds account for nearly twice as much investment as equities.

Question 4

In Australia what is the size of the bond market compared to the equities market?

Answer 4

In Australia, the bond market is approximately equal in size to the equity
market.”

Question 5

Why not more attention to the bond market, given its size?

3 main reasons

Answer 5

◦ Less liquid markets, typically bonds sold in large parcels
◦ Most bonds sold in the “over-the-counter” (OTC) market
◦ Less volatility in return (i.e., less interesting?)

Question 6

How to invest in the bond market?

Answer 6

either via bonds issued by individual or by buying into a bond index via active bond index or passive index

Question 7

What is the concern about the Australian bond market being too small?

Answer 7

causing over-allocation of portfolios to equities

Question 8

How are financial assets are priced?

Answer 8

Financial assets are priced relative to each other (“Ketchup economics”).

Question 9

If a economic condition or political condition effects the bond prices also effect what?

Answer 9

affect the value of other assets