- Repurchase agreements - short-term sales of securities with an agreement to repurchase the securities at a higher price - safe on term of credit risk - act as collateral if the borrower defaults.

- individuals buying stocks on margin borrow part of the funds to pay for the stocks from their broker - rates paid are around 1% higher than rate on short term T-bills

Chap 2 Flashcards by Thảo Nhi

Money market

subsector of fixed income market

short-term, high-liquid and low risk debt instruments

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US Treasury bills

sold by government to public investors -> raise funds at discount rate
Highly liquid
Incomes from T-bills are exempted from taxes and local taxes

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Specified securities of Money Market

Treasury bill
Certificates of Deposit
Commercial paper
Banker’s acceptance
Eurodollars
Repos and Reserves
Brokers call
Federal funds

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Ask price

Price dealer willing to sell

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Bid price

Price dealer willing to purchase

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bid-ask spread

difference between bid and ask price

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bank-discount method

bill’s discount from its maturity
360 days
% of face value

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Asked yield (bond yield equivalent)

yield that investor makes when hold bill until maturity

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Certificate of Deposit (CD)

time deposit with a bank
cannot be withdrawn on demand and only get paid interest
only get principal at the end

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Commercial paper (CP)

short term unsecured debt
issued by large corporation
Maturity: 1-2monts
traded in secondary market, quite liquid

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Banker acceptance

an order to a bank to pay a sum of money at a future date (6 months)
“accepted” -> banks are responsible for paying the holders of the acceptance
can be traded in secondary market

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Eurodollars

dollar denominated time deposits at a foreign bank, not necessarily EU banks
eurodollar deposits are for large bank, around 6 months

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Repos

Repurchase agreements
short-term sales of securities with an agreement to repurchase the securities at a higher price
safe on term of credit risk
act as collateral if the borrower defaults.

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reverse repo

mirror image of repo

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broker’s call

individuals buying stocks on margin borrow part of the funds to pay for the stocks from their broker
rates paid are around 1% higher than rate on short term T-bills

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Federal funds

funds in the accounts of commercial bank at Federal Reverse Bank
- Fed funds rate commands great interest as key barometer of monetary policy

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LIBOR market (London interbank offer rate)

Rate large banks in London are willing to lend money among themselves, serving as the benchmark for financial contracts

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EUIBOR

similar to LIBOR but in eurozone

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Money market securities’s yields

Low risk but not risk free -> higher yields than T-bill

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Specified securities of Bonds Market

Treasury bonds and notes
Federal agency debt
Municipal bonds
Corporate bonds
Mortage-backed securities

Specified securities of Equity Market

common stocks

- preferred stocks

Specified securities of Derivatives Market

Options
Futures and forwards
Swaps

Indexes

Dow Jones averages
Standard and poor
Bond market indicators
International indexes

Bond markets

longer term

sometimes called fixed income capital market

Treasury notes and bonds

- debt obligations of federal government with original maturity for 1 year - semi annual payment

Yield to maturity

calculated by determining semi annual yield then doubling it

inflation protected treasury bond

bonds issued by government, provide citizens hedge from inflation rate

federal agency debt

government issues their own securities -> finance their own debts agencies are formed to channel credit to a particular sector of the economy

international bonds

Eurobonds/international bonds: bonds denominated by the currency of other countries from the country it is issued

municipal bonds

bonds issued by state and local government | exempted form federal income taxations

2 types of municipal bonds

- General obligation bonds: backed by "full faith and credit" of issuer - revenue bonds: issued to finance commercial enterprises; backed by the revenues from a given project or by the municipal agency operating the project.

when compare

after tax return and tax exempt bonds

What is the yield ratio for municipal bonds? (r[taxable])

r[muni] / r[taxable] = Yield ratio

Tax bracket

1 - r[muni] / r[taxable]

whether to hold taxable debt or municipal debt?

1 > r[taxable] > 0: Hold taxable debt | r[taxable] > 1: hold municipal debt

Corporate bonds

private firms borrow money directly from public using corporate bonds paying semi annual coupons during bond's lives and return face value at maturity

types of corporate bonds

5 types: - secured bonds - subordinated debentures - debentures - callable bonds - convertible bonds

Callable bonds

Bonds that give the firm the option to repurchase the bond from the holder at a stipulated call price.

Convertible bonds

give the bond holder the option to convert each both into a stipulated number of shares of stock.

Mortgage backed securities

- ownership claims a pool of mortgage / an obligation secured by a pool

conforming mortgage

loans that satisfy certain underwriting guidelines

subprime mortgage

riskier loans made to financially weaker borrowers, make housing more affordable

common stocks/equities

ownership shares in a corporation, entitles to 1 vote

proxy vote

shareholders who cant attend the annual meeting can vote by proxy

characteristics of common stocks

- Residual claims: stockholders are last in line in event of liquidating - Limited liability: not personally liable for firm's obligation

Listings of stocks

comparison table with certain information highlights key info

Price to earning ratio (PE Ratio)

ratio of current stock price to last year earnings per share

Preferred stocks

- promise to pay stockholders fixed income; doesnt convery to voting power - pay dividends to stockholders treated as dividends more than interest -> not tax-deductible

Dow jones average

performance of 30 large, blue-chop in US since 1986