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Federal Funds:
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1. Banks maintain deposits of their own at the Fed Res Bank
2. Each member of Fed Res Sys is required to maintain a min bal in a reserve acct w/Fed
3. Required balance depends on total deposits of the bank's customers
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EX of Bank Disc Method: PG 26
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ASKED = 1.19% - Means dealer is willing to sell bill at a discount from par value of 1.19%X (161/360) = .532%
Bill w/10,000 par valu could be purchased for 10,000 X (1-.00532)=9,946.80
BID = 1.20% - dealer would be willing to purchase the bill for 10,000 X [1-.0120 X (161/360)] = 9,946.33
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Asked Price:
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Price you would have to pay to buy a T-Bill from securities dealer
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Coupon Payments: PG 30
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1. Bonds and Notes make semiannual interest pymnts
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Industrial Development Bond:
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1. Revenue bond that is issued to finance commercial enterprises, such as construction of a factory that can be operated by a privat firm
2. Gives municipality ability to borrow at tax-exempt rates
3. Fed gvmt limits the amt of these bonds that can be issued
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Repurchase Agreements:
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1. Repos, RP's - Dealers in gvmnt securities use as a form of ST, usually overnight, borrowing
2. Dealer sells sec to an investor with an agreement to buy back those securities the next day at a slightly higher price
3.
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T-Bills:
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1. Most marketable of all money market
instruments
2. Represent simplest form of borrowing
3. Gvmt raises money by selling bills to public
4. Investors buy the bills at a discount from the stated maturity value
5. Diff between purchase price and the maturity value represents the investor's earnings
6. Minimum denomination $100
7. Earnings taxable at federal level - exempt from state and local taxes
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Wilshire 5000:
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1. Ultimate US equity index so far computed of the market value of essentially all actively traded stock in US
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Fed Funds Rate:
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1. Fed Funds loans rate
2. Rate of interest on very ST loans among fin institutions
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Name 8 types of Money Market Securities:
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1. T-Bills
2. COD's
3. Commercial Paper
4. Banker's Acceptance
5. Eurodollars
6. Repos and Revenues
7. Federal Funds
8. Borker's Calls
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Preferred Stock: PG 38
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1. Nonvoting shares in a corporation ,usually paying a fixed stream of dividends
2. Preferred stock payments are treated as dividends rather than as interest on debt they are not tax deductible for the firm
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Mortgage Backed Securities:
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1. Either an ownership claim in a pool of mortgages or an obligation that is secured by such a pool
2. These claims represent securitization of mortgage loans
3. Mortgage lenders originate loans then sell packages of these loans in the secondary market
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Formula for tax bracket at which investors are indiff between txbl and tax-exempt bonds:
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t = 1- (rm/r)
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Eurodollars:
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1. Dollar-denominated deposits at foreign banks for foreign branches of American banks
2. Escape regulation of Fed Res by locating outside US
3. Large sums
4. <6mos
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Treasury Notes and Bonds:
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1. How us gvmt borrows funds
2. T-notes - maturities ranging up to 10yrs
3. T-Bonds - maturities 10-30yrs
4. May be issued in increments of 100, more commonly issued at 1,000
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High tax-bracket individuals tend to hold what type of securities? Why?
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1. Equivalent taxable interest rate increases w/the investor's tax bracket; higher the bracket the more valuable the tax-exempt municipal bond
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Put Options: PG 45
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1. Gives its holder the right to sell an asset for a specified exercise price on or before a specified expiration date
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Corporate Bonds:
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1. Means by which private firms borrow money directly from the public
2. Typically pay semiannual coupons and return face value at maturity
3. >Risk
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Secured Bonds: PG 34
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Specific collateral backing them in the event of firm bankruptcy
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Name 3 most well-known groups of indexes for Bond Market indicators
are?
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1. Merrill Lynch
2. Barclays (formerly Lehmen Brothers)
3. Saloman Smith Barney (now part of Citigroup)
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Certificates of Depostis:
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1. Time deposit with a bank
2. May not be w/drawn on demand
3. Bank pays I & P to the depositor only at end of fixed term of the CD
4. >$100,00 - negotiable, can be sold to other investors
5. ST CD's- highly marketable
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Depository Reciepts:
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1. ADR's
2. Certificates traded in US markets that represent ownership in shares of a foreign company
2. Created to make it easier for foreign firms to satisfy US security registration requirements
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Name 2 instruments in the Equities Market:
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1. Common Stock
2. Preferred Stock
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Reverse Repo:
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Dealer finds an investor holding gvmt securities and buys them w/an agreement to resell them at a specified higher price on a future date
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Debentures
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Unsecured bonds - have no collateral
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Term Repo:
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1. Identical transaction as repo except term of implicit loan can be >30 days
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NYSE:
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1. Publishes a market value-wtd composite index of all NYSE listed stock
2. Addition to subindexes for industrial, utility, transportation and financial stock
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Common Stocks:
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Represent ownership shares in a corporation
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Derivative Markets:
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1. Values derive from, or are contingent on the values of other assets
2. Such as: commodity prices, bond/stock prices, market index values
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Subprime Mortgages:
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Riskier loans made to financially weaker borrowers were bundled and sold by private label issuers.
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Two characteristics of common stock an an investment are?
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1. Residual Claim - stockholders are the last in line of all those who have a claim on the assets and income of the corporation
2. Limited Liability - shareholders can loose in event of the failure of the corporation is their original investment
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P/E Ratio: PG 37
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1. Ratio of the current stock price to last year's earnings
2. Tells how much stock purchasers must pay per dollar of earning the firm generates for each share
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ST Tax Anticipation Note:
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1. Raise funds to pay for expenses before actual collection of taxes
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Equivalent Taxable Yield:
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r = rm/(1-t)
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Types of Corporate Bonds:
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1. Secured Bonds
2. Debentures
3. Subordinated Debentures
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Eurobond:
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1. Bond denominated in a currency other than the of the country in which it is issued
2. AKA - International Bonds
3. Many firms issue bonds in foreign countries but in the currency of the investor
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Bid Price:
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Slightly lower price you would receive if you wanted to sell a bill to a dealer
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The Bond Market:
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1. Composed of longer-term borrowing or debt instruments
2. Comprise the fixed-income capital market
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Call option:
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1. Gives its holder the right to purchase an asset for a specified price on or before some specified expiration date
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S & P's 500
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1. Improvement over DJIA in two ways:
a) More broadly based index of 500 firms
b) Market-Value wtd index
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General Obligation Bonds:
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Backed the full faith and credit (taxing power) of the issuer
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Name some Foreign and Internaional Market Indexes:
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1. Nikkei (Japan)
2. FTSE (UK)
3. DAX (Germany)
4. Hang Seng (Hong Kong)
5. TSX (Toronto)
6. MSCI (Mortgage Stanley Capital International)
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Eurodollar CD:
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1. Resembles domestic bank CD except it is the liability of a non US branch of a bank - typically London
PG 27
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Broker's Call:
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1. Individuals who buy stocks on margin borrow part of the funds to pay for the stocks form their broker
2. Broker in turn may borrow the funds form a bank, agreeing to repay the bank immediately (on call)
3. Rate paid usually ab 1% point higher than rate on ST T-bils
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Bank Discount Method flawed for 2 reasons: PG 26
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1. Assumes that the year has only 360 days
2. Computes yield as fraction of par value rather than of the price the investor paid to acquire the bill
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Two types of municipal bonds are?
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1. General Obligation Bonds
2. Revenue Bonds
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NASDAQ:
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1. National Association of Securities dealers
2. Publishes >3,000 firms
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LIBOR:
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1. London Interbank Offer Rate
2. rae at which large banks in London are willing to lend money among themselves
3. Has become ST interest rate quoted in the European money market
4. Serves as a reference rate for wide range of transactions
5. May be tied to currencies other than the US $
PG 28
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Name 3 types of Derivatives:
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1. Options
2. Futures and forwards
3. Swaps
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Commercial Paper:
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1. Large well-known co's that issue their own ST unsecured debt notes directly to the public, rather than borrowing from the bank
2. Sometimes backed by a bank line of credit, gives borrower access to cash that can be used if needed to pay off the paper at maturity
3. Maturity ranges up to 270 days
4. >270 days require registrations w/SEC
5. Trades in secondary markets
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Name steps to build an investment portfolio:
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1. Asset Allocation - how much money to allocate to broad classes of assets.
2. Security Selection-within each class investor then selects specific assets from more detailed menu
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Municipal Bonds:
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1. Issued by state and local governments
2. Interest Income exempt from fed income taxation and state/local taxation in local state
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Bank Discount Method:
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Means that the bill's discount from par value is "annualized" based on a360-day year, then reported as a percentage of par value PG 24
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Bid-Ask Spread:
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The difference in these prices, which is the dealers source of profit
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Subordinated Debentures:
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Lower priority claim to the firm's assets in the event of bankruptcy
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Conforming Mortgages:
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Loans had to satisfy certain underwriting guidelines before they could be purchased by Fannie Mae or Freddie Mac
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Bankers' Acceptances:
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1. Starts as an order to a bank by a bank's customer to pay a sum of money at a future date, typically w/in 6 mos
2. When bank endorses order for pymnt as "accepted," it assumes responsibility for ultimante pymnt to the holder of the acceptance
3. At the point the acceptance can be traded on in secondary markets
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EURIBOR:
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1. European Interbank Offer Rate
2. Banks w/in euro zone are willing t lend euros among themselves
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Federal Agency Debt:
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1. Some gvmt agencies issue their own securities to finance their activities
2. Agencies formed for public policy reasons to channel credit to a particular sector of the economy that Congress believes is not receiving adequate credit through normal private sources
3. Major mortgage-related agencies are
a) FHLB - Fed Home Loan Bank
b) FNMA - Fed Nxnl Mortgage Association
c) GNMA - Gvmnt Nxnl Mortgage Association
d) FHLMC - Fed Home Loan Mortgage Corp
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Asset-Backed Commercial Paper:
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1. Issued by financial firms such as banks
2. Typically was used to reise funds for the institution to invest in other assets
3. These assets in turn were used as collateral for the CP
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Fixed-Income Capital Market:
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1. Most of them promise either a fixed stream of income or a stream of income that is determined according to a specified formula
2. These formulas can result in a flow of income that is far from fixed
3. Simpler to refer to as debt instruments or bonds
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T-Bill's Bond equivalent yield: PG 26
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EX: An investor who buys the bill for the ASK price and holds it to maturity will see investment grow over 161 days by a multiple of 10,000/9,946.8 - 1.00535 or .535%
Annualizing this return using 365-day year result in a yield of .535% X 365/161=1.213%
-reported in last column under ASKD YIELD
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Revenue Bonds:
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1. Issued to finance particular projects and are backed either by revenues from that project or by the municipal agency operating the project
2. Typical issuers are :
a) airports
b) hospitals
c) turnpike or port authorities
3. Riskier than Gen Ob Bonds
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Name 5 types of instruments in the bond market:
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1. Treasury bonds and notes
2. Federal agency debt
3. Municipal bonds
4. Corporate bonds
5. Mortgaged-back securities
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Dow Jones Industrial Average: PG 40
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1. (DJIA)
2. 30 large blue-chip corporations
3. Computed since 1896
4. Measures return (excluding dividends) on a portfolio that holds one share of each stock
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Equally Wtd Indexes: PG 43
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Do not correspond to buy-and-hold portfolio strategies
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Futures Contracts: PG 46
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1. Calls for the delivery of an asset at a specified delivery or maturity date, for an agreed upon price to be paid at contract maturity
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Money Market Mutual Funds:
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1. Easily accessible to all investors
2. Pool resources of many investors and purchase wide variety of money market securities on their behalf
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Name 4 Stock Market Indexes:
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1. Dow Jones Averages
2. S&P's indexes
3. Bond Market indicators
4. International indexes
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Money Market:
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1. Subsector of debt market
2. Consists of ST debt securities that are highly marketable
3. Trade in large denominations
4. Out of reach to individual investors
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TIPS:
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1. Treasury Inflation Protected Securities
2. Gvmts issue bonds that are linked to an index of the cost of living to provide citizens w/an effective way to hedge against inflation
3. Principle amt adjusted in proportion to increases in the CPI
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