Part 2 Notes

Question 1

Spending Units

Answer 1

Households

Businesses/Firms

Government

Question 2

Direct Credit Markets

Answer 2

Money Markets

Coputal Markets

Question 3

Deficit Spending Units

Answer 3

Households

Businesses/Firms

Governments

Question 4

Financial Intermediaries

Answer 4

Banks

Credit Unions

Insurance Companies

Mutual/Hedge Funds

Question 5

Attributes of Financial Claims

Answer 5

All have a degree of liquidity

All have RISK! (Default and market)

Yield (rate of return)

Relationships:
L^ R_ Y_
L_ R^ Y^

Question 6

Zero Coupon Financial Claims

Answer 6

a credit market instrument that is bought at a price below its face value and whose face value is repaid at the maturity date; it does not make any interest payments (ex: US Treasury Bills – 90 days to mature; savings bonds)

Question 7

Discount Rate

Answer 7

r = [(1000 – P)/1000] X (360/DTM)

r = discount rate on yield
$1000 face value
P = price paid for T-Bill
360 = number of days/year rounded
DTM = days to maturity

Question 8

Bid

Answer 8

“buy at”

Represent prices

ex: 110.26 = $110 and 26/32 for every $100

Question 9

Ask

Answer 9

“sell at”

Represent prices

ex: 111.2 = $110 and 2/32 for every $100

Question 10

Current Yield

Answer 10

YC = R/P

YC = current yield
R = coupon payment
P = market price

Question 11

Current yield

Answer 11

Market price > face value

Question 12

Current yield > coupon rate

Answer 12

Market price

Question 13

Yield to Maturity

Answer 13

YM = [R+(C/N)]/P

YM = yield to maturity
C = capital gain or loss realigned at maturity
N = number of periods on yield
R = coupon payment
P = market price

Question 14

Marketable Debt (in order)

Answer 14

US T-Notes
US T-Bonds
US T-Bills
Treasury Inflation Protected Securities (TIPS)
Federal Reserve Notes
Federal Financing Bank

Question 15

Non-Marketable Debt

Answer 15

holder can only turn it in to the US Government, cannot sell to someone else

Question 16

Non-Marketable Debt (in order)

Answer 16

Government Account Series
US Savings Series (ex: savings bonds)
State/Local Series
Domestic Series
Other
Foreign Series

Question 17

Who owns the debt?

Answer 17

US Government and Federal Accounts: 28%
State and Local Governments: 5%
Federal Reserve: 13%
Total Government Ownership: about 46%

Domestic Private: 15%
Other: 5%
Total Domestic: 20%

Foreign Investors: 34%

Question 18

Debt vs. Equity

Answer 18

liability vs. ownership

Question 19

Primary Markets

Answer 19

the first time this financial security has been sold; created by investment bankers as they underwrite these securities

Question 20

Secondary Markets

Answer 20

subsequent times a financial security has been sold

Question 21

NASDAQ

Answer 21

National Association of Securities Dealers Automated Quotation; electronic trading of securities

Question 22

Money Market

Answer 22

A financial market in which only short-term debt instruments (generally those with original maturity of less than one year) are traded

Question 23

US T-Bills

Answer 23

short term debt instruments of the US governments that are issued in one-, tree-, and six-month maturities to finance the federal government; set amount at maturity and have no interest payments

Question 24

Commercial Paper

Answer 24

a short term debt instrument issued to large banks and well-known corporations, such as Microsoft and General Motors; no collateral backing other than the good name of the company

Question 25

Banker’s Acceptance

Answer 25

short term debt instrument

commercial bank draft requiring the bank to pay the holder of the instrument a specified amount on a specified date, which is typically 90 days from the date of issue, but can range from 1 to 180 days

can be bought/sold by market at a discount so companies don’t have to wait

brings element of trust to companies that don’t know each other but need to do transactions

foreign or domestic (Germany example in class)

Question 26

Negotiable Certificate of Deposit

Answer 26

short-term debt instrument

face value of ~$1,000,000+

large financial institutions create IOUs to create reserves and raise liquidity level

IOUs that mature in x amount of time

can be bought/sold in money market at a discount, but cannot be cashed in before maturity

very safe; sound/well known sellers and buyers (banks, mutual funds, lg. companies, etc.)

Question 27

Federal Funds

Answer 27

short term debt instrument

excess reserves that commercial banks deposit at regional Fed banks

can then be lent to other commercial banks with insufficient reserves

loans are made at relatively low interest rates and typically have extremely short durations: “overnight”

Question 28

Repurchase Agreements (Repos)

Answer 28

short term debt instrument for dealers in government securities

dealer sells the government securities to investors and buys them back the following day

(initial seller = repo, buyer = reverse repurchase agreement)

basically a federal fund with collateral

Question 29

Eurodollar Accounts

Answer 29

short term borrowing from foreign banks

US-dollar denominated deposits at foreign banks or foreign branches of American banks

by locating outside of the US, Eurodollars escape regulation by the FED

Question 30

Capital Market

Answer 30

Financial instruments (not “debt”) that are traded that have a maturity date longer than one year

Question 31

Corporate Common Stock

Answer 31

represents ownership (equity) in the company; stockholders have a “right” to control/profits/dividends… but no guarantee

more return than bonds/debt instruments because more risky;

limited liability; no maturity date; not callable by company

Question 32

Notes and Bonds

Answer 32

security that promises to make payments periodically for a specified period of time; priority in liquidation (ahead of stockholders)

have interest rate/yield/rate of return either fixed or floating/variable (mostly fixed)

Question 33

Debenture

Answer 33

any note or bond that is NOT backed by collateral

Question 34

Indenture

Answer 34

any note or bond; contract and rules