Asset Classes & Finacial Instruments - Chapt 2 - Prof Notes

Asset Classes & Finacial Instruments - Chapt 2 - Prof...

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CHAPTER 2 Asset Classes and Financial Instruments
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Major Classes of Financial Assets or Securities • Money market instruments • Bond market securities • Equity Securities • Stock market indexes • Derivative markets
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The Money Market • Sub-sector of fixed income markets • Highly liquid securities • Short maturities • Traded in large denominations – As a result out of reach for individual investors, except through MMMf • Low credit risk (ABCP)
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Rates on Money Market Securities
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The Money Market • Treasury bills or T-Bills – Govt. raises money through T-Bills – Govt. issue, 28/91/182 day maturity – Most marketable, very liquid – Very low risk – Quoted on yields – Sold to investors at a discount – On maturity, the investor gets full face value of the bill – The difference between price paid, and the maturity value received (face value) is the return to investor
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Treasury Bill Quotes/Yields • Maturity – Date when investor gets paid back face value • Days to maturity – nos. of days to maturity date • Bid – What is offered to an investor who wants to see the asset • Ask – What is asked of the investor that wants to buy this asset • Price/Yield relationship – Lower price implies higher yield; higher price implies lower yield
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Treasury Bill Quotes/Yields Bank discount Method • Is the quoted convention • Method to calculate price of the security • Does not reflect true yield of the security • Consider Example - – Annualized Ask Yld = 4.9% – Days to maturity = 90 – Assumed days per year = 360 – 90 day Yld = 4.9%*(90/360) = 1.225% – Price = (100%-1.225%) = 98.775% (OR = ($100-$1.225) = $98.775 )
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Treasury Bill Quotes/Yields True Ask Yield • 90 day true yield = (100/98.775) - 1 = 1.24% • Actual days per year = 365 • True Annualized Ask Yld = 1.24%*(365/90) = 5.03%
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The Money Market • Certificates of Deposits – Fixed term deposit with bank – May not be withdrawn on demand – Interest and principal paid at maturity – FDIC insured, so very secure – FDIC limit was 100,000 – More recently the limit has been raised to 250,000 on account of the wave of bank failures
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The Money Market • Commercial Paper (CP) – Issued by large, well known corporations – Unsecured, short term up to 270 days – While it is unsecured, there will be an underlying bank line of credit as support in the event of inability to repay – Small investors access CP through MMMF – ABCP is a more recent variant of CP, issued by financial institutions
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The Money Market • Asset Backed Commercial Paper (ABCP) – ABCP is a more recent variant of CP – Issued by financial institutions to finance purchase of other assets; these assets in turn are used as collateral for the ABCP – Assets include mostly ABS products (asset backed products) like student loan or auto loan paper – This product saw significant distress after mid- 2007 as ABS products saw large spikes in defaults
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The Money Market • Bankers Acceptances
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This note was uploaded on 09/15/2009 for the course FINANCE 9783 taught by Professor Krishnamoorthynarasimhan during the Summer '09 term at CUNY Baruch.

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Asset Classes & Finacial Instruments - Chapt 2 - Prof...

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