Capital Markets Flashcards
(19 cards)
Capital Market
Long-term asset market (maturity over 1 year)
Capital markets provide financing for
Firms’ physical assets or long-term projects; homeownership
Real yield formula
Real yield = nominal yield - inflation rate
Capital market bonds are exposed to
inflation risk, liquidity risk, and default risk
Why do capital market bonds have greater interest rate risk?
Because they have longer durations
What’s one difference between money market instruments and capital market instruments?
For money market instruments, inflation risk is negligible because there is not much inflation in the short term
T-notes (maturity)
1 to 10 years
T-bonds (maturity)
Over 10 years
How are T-notes and T-bonds similar to T-bills?
All are issued by the treasury department, are default risk free, and are issued via auctions
How are T-notes and T-bonds different from T-bills?
T-notes and T-bonds are long-term securities, carry coupons, and have higher exposure to interest rate risk and inflation risk. T-bills are short-term, zero-coupon, and have lower exposure to interest rate risk and inflation risk
Treasury Inflation Protection Securities (TIPS)
Notes and bonds issued by the treasury department that adjust cash flows according to inflation
Inflation and TIPS are
Positively correlated
How do TIPS securities work?
The coupon rate is fixed while the face value adjusts for inflation before each coupon is paid
If inflation increases…
the par value goes up and therefore the coupon payment also goes up
If inflation decreases…
the par value goes down and therefore the coupon payment also goes down
The Fisher Equation
calculates future inflation
The Fisher Equation (formula)
expected future inflation = nominal interest rate - real interest rate
Breakeven rate
the TIPS implied future inflation rate
