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Investments 1 > PP 3 - The Money Market > Flashcards

PP 3 - The Money Market Flashcards

1
Q

three main categories of asset classes

A
  1. fixed income (debt) securities
  2. equities (stocks)
  3. derivaties
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2
Q

fixed income (debt) securities promise….

A

to make fixed payments in the future

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3
Q

equities (stocks) are…

A

claims to a share of the profit of a corp

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4
Q

derivatives are…

A

payments that depend on the prices of other financial assets

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5
Q

Money market is made up of…

A

debt instrument with less than 1 year to maturity

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6
Q

maturity of in money market is…

A

less than one year

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7
Q

main characteristics on the money market

A

short-term, low risk, highly liquid, low Avery return

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8
Q

the money market is sometimes referred to as…

A

cash equivalents

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9
Q

a treasury bill is a…

A

government debt obligation with less than 1 year to maturity

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10
Q

a treasury bill is ___ owned and exempt from…

A

federally; state tax

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11
Q

a certificate of deposit is…

A

time deposit at a bank

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12
Q

commercial paper is…

A

a short-term debt issued by a large, well-known corporation

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13
Q

what is a bankers’ acceptance?

A

a promise by a bank to pay a pre-specified amount

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14
Q

a bankers acceptance is used to…

A

facilitate import/export transactions

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15
Q

what is a repurchase agreement(repo)?

A

short-term sale of securities with the promise to repurchase the securities at a higher price

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16
Q

who usually used repos?

A

financial institutions such as banks and hedge funds

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17
Q

what are eurodollars?

A

dollar-demonimated deposits held at foreign banks

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18
Q

what are FED funds?

A

funds in the account of commercial banks at the FED

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19
Q

what is the London Interbank Offer Rate (LIBOR)?

A

rate at which large banks in London lend to each other

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20
Q

LIBOR was the..

A

base rate for many loans and derivates

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21
Q

what happened in the 2012 LIBOR scandal?

A

participating banks were colluding to manipulate their LIBOR submissions to inhale profits on their derivative trades

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22
Q

what happened to LIBOR and why?

A

discontinued in 2022 due to concerns of manipulation

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23
Q

what replaced LIBOR?

A

Secured Overnight Financing Rate (SOFR)

24
Q

what is the SOFR?

A

the rate on repurchase agreements on US treasury securities

25
Q

what money market instrument triggered the MMMF 2008 crisis?

A

commercial papers

26
Q

a money market mutual fund (MMMF) is a…

A

metal fund that invests in money market instruments

27
Q

between 2005-2008, MMMFs grew by…

A

88%

28
Q

what started the MMMF crisis?

A

when the Lehman Brothers filled for bankruptcy on sep 15

29
Q

why was Lehman filling bankruptcy not good?

A

many funds had heavily invested in Lehman’s commercial paper

30
Q

what did Reserve Primary Fund do shortly after?

A

“broke the buck” due to its holdings of Lehman’s commercial paper

31
Q

what does “broke the buck” mean?

A

net asset value of a money market goes under $1

32
Q

the net asset value of RPF…

A

fell below $1 per share

33
Q

what ensued from the crisis?

A

a run on the money market funds

34
Q

a run on the money market funds ensued; it triggers…

A

investor’s redemptions of more than $300 billion

35
Q

what did the US treasury do to attempt to stop the run?

A

temporarily offered to insure all money funds

36
Q

what amount was in these money funds?

A

$3.4 trillion

37
Q

2 important causes of 2008 crisis

A
  1. money market fund experienced an unprecedented expansion in their risk-taking opportunities
  2. finds has strong incentives to take on risk
38
Q

why did funds have strong incentives to take on risk?

A

fund inflows we highly responsive to fund yields

39
Q

MMMf’s yield ____ after subprime mortgage crisis

A

increased

40
Q

RPF took ____ by increasing holding in commercial papers

A

more risk

41
Q

how did RPF take on more risk?

A

increased holdings in commercial papers

42
Q

under management, RPF experienced…

A

better performance and growth in assets

43
Q

what did fidelity instruction prime do?

A

not take on more risk

44
Q

how did not taking on more risk affect fidelity?

A

did not experience better performance or growth in assets under management (did not “break the buck”

45
Q

RPF was managed by…

A

a stand-alone fund company with almost no other funds under management

46
Q

what does it mean to be a stand-alone company?

A

only one fund under management

47
Q

Fidelity is…

A

one of the worlds largest assets managers

48
Q

In 2006, Fidelity sponsored what types of funds?

A

non-money market mutual funds

49
Q

non-money market funds charge __________ than money market funds

A

higher expense ratios

50
Q

what % of fidelities assets did the 252 non-money market mutual funds account for?

A

93.9%

51
Q

if the run on Fidelity Institutional Prime triggered outflows from its other funds…

A

fidelity could suffer large losses from a failure of its money market fund business

52
Q

Fidelity is a ______ fund

A

conglomerate

53
Q

three yields in the money market

A
  1. bank discount yield (BD)
  2. bond equivalent yield (BEY)
  3. equivalent annual yield (EAY)
54
Q

how do you compare returns across securities in the MM, how to compare returns with bonds?

A

annualizing returns

55
Q

what is the flaw of bank discount yield?

A

lower than actual value because it only used 360 days

56
Q

generally, what is the relationship between the answers to BD, BEY, and EAY?

A

BD<BEY<EAY

Investments 1 (4 decks)

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