FINA4320 chapter 2 - Class 2 Financial Markets and...

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Financial Markets and Instruments Class 2
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Major Classes of Financial Assets or Securities Debt Money market instruments - short term, low risk (Cash equivalent, or Cash) Capital market - longer term, high/low risk Equity (stocks) Derivative securities
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Markets and Instruments Money Market Debt Instruments (short-term) Derivatives Capital Market Bonds (long-term) Equity Derivatives
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Money Market Instruments I Treasury bills (T-bills, bills) government sells bills - “borrows” money investors - buy at a discount (no coupon) at maturity - receive face value (normally $10,000) (purchase price - face value) = investor’s payoffs Issued: maturities 28, 91, 182 days, weekly maturity 52 weeks, monthly Taxes: Federal only; exempt from state & local
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Auction for Treasury Securities I Treasury bills (T-bills, bills) Sales: Auction Competitive bid: An order for the specific quantity at a specific price the bid should be high enough to be accepted “Winner’s curse” (overbidding); loosing (low bid) Noncompetitive bid: Buy at average price of competitive bids (unconditional)
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Auction for Treasury Securities II T-Bills: Bid Submission
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Money Market Instruments III Certificates of deposit: Time deposit with a bank (is not withdrawn before fixed term) Large (larger than $100,000) negotiable (can be sold to other investor) Short-term (less than 3 months) - marketable (liquid) Commercial Paper short-term debt issued by large corporations Bankers Acceptances (traded in secondary mkts) An (accepted) order to a bank to pay at future date
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Money Market Instruments IV Eurodollars dollar-denominated deposits at foreign or foreign branches of American banks; large sums, less than 6 months maturity
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FINA4320 chapter 2 - Class 2 Financial Markets and...

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