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Unformatted text preview: ACTSC 445: Asset-Liability Management Department of Statistics and Actuarial Science, University of Waterloo Unit 2 – Overview of the Types and Features of Fixed Income Securities References (recommended readings): Chap. 1 of Fabozzi et al. Major Types of Financial Assets (Securities) Financial markets are structured as follows: • Money Market • Capital Market – Equity Market – Debt Instruments → fixed income securities – Derivative Securities Note: Money market instruments are usually also considered to be fixed income securities (FIS). In what follows, we will mostly talk about FIS. Fixed Income Securities: a quick tour What does it refer to? (From Wikipedia) Any type of investment that yields a regular (fixed) payment. (From Ind. All.’s web page) Product with a pre-established income, maturity date, and value. Idea: An investor lends money to a borrower, who agrees to pay it back under some conditions related to the time-value of money. Can be contrasted with variable return securities like stocks. Types of FIS: Money market instruments; Bonds; Preferred stock; Mortgage-backed securities (MBS). Money Market Securities • Refers to securities issued by corporations and governments for short-term borrowing (maturity one year or less). 1 • Sometimes called “cash equivalents” because they have such short maturity, high liquidity, and safety, that they can be converted into cash immediately. Types of Money Market Securities 1. Treasury Bills (T-bills) 2. Certificates of Deposit 3. Repurchase Agreements (REPOs) and Reverse REPOs 4. Commercial Paper Short term unsecured debt note issued in the open market; alternative to bank borrowing; usually less than 270 days (often 1-2 months) 5. Bankers acceptance Can think of it as a post-dated check, which is created when a customer asks a bank to make a payment to a third party at some future date; when the bank stamps the check as being “ accepted”, the bank is now responsible for the future payment and a bankers acceptance has been created. This type of instrument is mostly used to facilitate international commercial exchanges, when the creditworthiness of one trader is unknown to the trading partner. It is considered very safe, and can be traded on secondary markets as a discount security. 6. Eurodollars deposits Deposits made in $US at a bank located outside the US. We’ll now discuss the three first types in more details, and talk about the LIBOR rate as well. T-bills • issued by governments ⇒ no default risk • also known as “discount” or “zero-coupon” securities because they don’t pay coupons, and are (at least in Canada and US) discount instruments (i.e., trade at a discount from face value) • US – issued in weekly auctions – 3 maturities: 4, 13 and 26 weeks – secondary market for US T-bills is the largest and most liquid in the world; run by dealers who trade T-bills on a bid-ask spread basis ( bid price is the one at which one can sell to a dealer;...
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This note was uploaded on 09/10/2010 for the course ACTSC 445 taught by Professor Christianelemieux during the Spring '09 term at Waterloo.
- Spring '09