Lecture 3 Flashcards
Primary Markets
Markets for issuing a _____________ and distributing to ____________.
Markets for issuing a new security and distributing to saver-lenders.
What are investment banks?
Info and marketing specialists for newly issued securities.
Secondary Markets
Market where _________ securities can be __________.
Market where existing securities can be exchanged.
Where are secondary markets exchanged on?
Stock Exchange
Examples;
- London Stock Exchange
- New York Stock Exchange
- Over-the-Counter (OTC) markets
Money Markets
‘Currency’ is ____ __________ traded in the money markets.
‘Currency’ is NOT ACTUALLY traded in the money markets.
Money Markets
The ________ in the money market are ____ term with ____ liquidity; therefore, __________________________
The SECURITIES in the money market are SHORT term with HIGH liquidity; therefore, THEY ARE CLOSE TO BEING MONEY.
Money Markets
- They are usually sold in _____ denominations.
- They have ___ default risk.
- They mature in ____ _____ OR ____ from their
original issue date. Most money market instruments
mature in ____ ____ ____ ____.
- Usually have a _______ ______ - generally ____
liquid.
- They are usually sold in LARGE denominations.
- They have LOW default risk.
- They mature in ONE YEAR OR LESS from their
original issue date. Most money market instruments
mature in LESS THAN 120 DAYS. - Usually have a SECONDARY MARKET - generally VERY
liquid.
The Capital Market
Exchange of ____-____ __________ - more than ___ ____.
Generally used to secure ____-____ financing for _______ ___________.
Exchange of LONG-TERM SECURITIES- more than ONE YEAR.
Generally used to secure LONG-TERM financing for CAPITAL INVESTMENT.
The Capital Market - Capital Investment
What are the 4 capital investments.
- Stock Market.
- Corporate Bond.
- Local and State government bonds.
- Government Securities
Stock Market
_______ part of capital market & held by ______ and _____________ investors.
LARGEST part of capital market & held by PRIVATE and INSTITUTIONAL investors.
Corporate Bond Market
Held by _________ companies, pension and retirement funds and others.
Held by INSURANCE companies, pension and retirement funds and others.
Government Securities
Held by ___________ banks, _________ and dealers.
Held by COMMERCIAL banks, INDIVIDUALS and dealers.
What is the relationship between the price of a bond and its YTM?
The bond price is the present value of the cash flows from a bond. The YTM is the interest rate used in valuing the cash flows from a bond.
b) Explain why some bonds sell at a premium over par value while other bonds sell at a discount.
If the coupon rate is higher than the required return on a bond kd, the bond will sell at a premium, since it provides periodic income in the form of coupon payments in excess of that required by investors on other similar bonds. If the coupon rate is lower than the required return on a bond, the bond will sell at a discount since it provides insufficient coupon payments compared to that required by investors on other similar bonds. For premium bonds, the coupon rate exceeds the YTM; for discount bonds, the YTM exceeds the coupon rate, and for bonds selling at par, the YTM is equal to the coupon rate.
c) What do you know about the relationship between the coupon rate and the YTM for premium bonds? What about for discount bonds? For bonds selling at par value?
Current yield is defined as the annual coupon payment divided by the current bond price. For premium bonds, the current yield exceeds the YTM, for discount bonds the current yield is less than the YTM, and for bonds selling at par value, the current yield is equal to the YTM. In all cases, the current yield plus the expected one-period capital gains yield of the bond must be equal to the required return.
