fic 314 aj - Ch2 asset classes and financial instruments...

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Unformatted text preview: Ch2 asset classes and financial instruments • Money market: very short term debt securities; highly marketable o T-bills most marketable Exempt from state and local taxes o Certificate of deposit o Commercial paper o Bankers acceptance: 0rder to a bank by a banks customer to pay a sum of money at a future day Can be traded in 2 nd market, liquid and safe o Eurodollars: dollar denominated deposits at foreign banks o Repos and reverses: dealer sells security to investor and agrees to buy back securities next day at slightly higher price Securities are collateral and diff in price is return o Fed funds: lending btwn banks to meet fed reserve minimum balance o L IBOR market: rate at which banks in London are willing to lend money among themselves o Yields on MM securities are lower bc of less risk • Bond market; longer maturities than MM securities o Treasury notes(up to 10yr maturities) and bonds (10-30 yrs) o TIPS bonds- inflation protected, principle is adjusted to increases in CPI, stream of income in real dollars (adjusted to inflation0 i following matury date denotes it is TIPS bond, has lower yield o fed agency debt- fannie mae, Freddie mac o international bonds o municipal bonds- issued by state and local gov’ts exempt from fed taxes and state taxes on pmts revenue bonds are issued to finance project and backed by revenues from that project tax exemption status on returns means lower yields • r(1-t) > return on non taxable bonds means better off investing in taxable bonds than tax free bonds • higher the tax bracket, more valuable the tax free feature is o corporate bonds-method private firms use to borrow money directly from public debentures: unsecured bonds callable (firm can repurchase bond from holder at call price) convertible (bondholder can convert into shares of stock) o mortgages and mortgage backed securities fixed rate has more liability to banks bc when IR increases they suffer losses adjustable rate has borrowers IR vary in response to changes in market IRs “pass throughs” passes interest payments made by borrow on to owner of mortgage security • Equity securities: common stock o Ownership in corp o Residual claim- SHs are last in line to have a claim on assets and income of corporation o Limited liability- SHs can lose no more than original invesetment in...
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This note was uploaded on 05/02/2010 for the course ACCT Finc314 taught by Professor Depue during the Spring '10 term at University of Delaware.

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fic 314 aj - Ch2 asset classes and financial instruments...

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