Lec2 - AF3316 Investments Shaojun (Shaun) Zhang, Ph.D. ASA...

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Unformatted text preview: AF3316 Investments Shaojun (Shaun) Zhang, Ph.D. ASA School of Accounting and Finance The Hong Kong Polytechnic University LECTURE 2 LECTURE 2 Asset Classes, Asset Classes, Financial Financial Instruments, and Instruments, and Securities Securities Markets Markets 2-2 AF3316 Lecture 2 Asset Classes and Financial Instruments CHAPTER 2 2-3 AF3316 Lecture 2 Major Classes of Financial Assets or Securities • Money market • Bond market • Equity markets • Indexes • Derivative markets 2-4 AF3316 Lecture 2 2.1 THE MONEY MARKET • Very short-term, highly liquid, and relatively low-risk debt securities • Trade in large denominations • Money market mutual funds 2-5 AF3316 Lecture 2 Table 2.2 Components of the Money Market 2-6 AF3316 Lecture 2 Money Market Instruments • Treasury bills (T-bills) – Issued weekly, 28, 91, and 182 days, $1,000 • Certificate of deposit (CD) – Fixed term, transferable, insured by FDIC • Commercial Paper (CP) – Backed by a bank line of credit • Bankers’ Acceptances – Bank’s credit, with six months 2-7 AF3316 Lecture 2 Figure 2.2 Treasury Bills 2-8 AF3316 Lecture 2 Money Market Instruments • Eurodollars – Dollar deposits at foreign banks • Repurchase Agreement (repo, or RP) – Overnight borrowing – Term repo, reverse repo • Brokers’ Calls – Repay the bank immediately (on call) • Federal Funds (fed funds) – Funds in banks’ reserve account • LIBOR Market 2-9 AF3316 Lecture 2 Figure 2.1 Money Rates 2-10 AF3316 Lecture 2 Figure 2.3 Spread between 3-month CD and T-bill rates 2-11 AF3316 Lecture 2 2.2 THE BOND MARKET • Fixed-income capital market • Longer-term borrowing or debt instruments than those money market securities 2-12 AF3316 Lecture 2 Bond Market • Treasury Notes and Bonds • Federal Agency Debt • International Bonds • Inflation-Protected Bonds • Municipal Bonds • Corporate Bonds • Mortgages and Mortgage-Backed Securities 2-13 AF3316 Lecture 2 Treasury Notes and Bonds • Maturities – Notes – maturities up to 10 years – Bonds – maturities in excess of 10 years • Par Value - $1,000 or more • Semiannual interest payments • Coupon rate – percentage of par 2-14 AF3316 Lecture 2 Figure 2.4 Treasury Notes and Bonds 2-15 AF3316 Lecture 2 Federal Agency Debt • Major issuers – Federal Home Loan Bank (FHLB) – Federal National Mortgage Association (FNMA, or Fannie Mae) – Government National Mortgage Association (GNMA, or Ginnie Mae) – Federal Home Loan Mortgage Corporation (FHLMC, or Freddie Mac) – Mortgage pass-through securities 2-16 AF3316 Lecture 2 Municipal Bonds • Issued by state and local governments • Types – General obligation bonds – Revenue bonds • Industrial revenue bonds • Maturities – range up to 30 years • Interest income on municipal bonds is not subject to federal and sometimes state and local tax 2-17 AF3316 Lecture 2 Figure 2.5 Outstanding Tax-exempt Debt 2-18 AF3316 Lecture 2 Municipal Bond Yields • To compare yields on taxable securities a...
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This note was uploaded on 06/06/2009 for the course AF AF3316 taught by Professor Shaojunzhang during the Spring '09 term at Hong Kong Polytechnic University.

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Lec2 - AF3316 Investments Shaojun (Shaun) Zhang, Ph.D. ASA...

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