Financial Markets and Risk Management 2

Question 1

LIBOR

Answer 1

Reflects price of funds in the international market

Compared to the US Federal funds rate

Quoted from London banks and calculated by the British bankers association

Question 2

APR

Answer 2

Equals Periodic Rate x 12

Question 3

Effective Annual Rate

Answer 3

Annual rate of interest being charged/earned

Calculation (1+APR/12) to the 12th power minus 1

Question 4

Private Placement

Answer 4

1) Unregistered bonds issued directly to specific number accredited investors with limited registration and disclosure info
2) Goal is to reduce registration costs
3) Approved by the SEC

Question 5

Nominal Risk free rate of interest is made up of 2 factors

Answer 5

Real rate of interest (risk free)

Inflation premium

Question 6

T-Bills –

Answer 6

maturity less than a year, sold in $1,000 denominations, maximum $5 million purchase

Question 7

T-Note –

Answer 7

Maturity between One and ten years

Question 8

T-Bonds –

Answer 8

maturity over 10 years

Question 9

When the Federal Reserve buys US Securities

Answer 9

Increases money supply

Drops interest rates