Module_5 - Module 5 Learning Goals To understand the...

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Module 5
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Learning Goals To understand the workings of the Public Debt markets To know the different instruments that are traded in these markets. To comprehend the role played by the Treasury in financing the State. To understand the primary and secondary markets and how they work. Learn to price the basic instruments. 2
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Context The Board of Directors of the Carlos3 savings bank has decided to expand our banking activity, offering brokerage services in the secondary Public Debt market, buying and selling bonds. This basically involves acting as an intermediary in the secondary bond market. The head of Market Development has contacted you to inform him of the current outlook for this market, since he wants to be sure the board's decision is really the best course of action. 3
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Overview Introduction Instruments Primary Market Pricing and the interest rate curve. Types of operation Secondary market 4
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Continuous assessment: Do the exercises. 5
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Introduction
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7 Introduction Public Fixed Income debt is defined as "all securities with a pre-defined return issued by national governments". This definition excludes all kinds of debt issued by private companies, public limited companies, regional governments, city councils etc. Fixed Income securities include a coupon, or periodic payment, similar to the interest payments on a savings account. However, the payment of the coupon may not be continuous and can depend on some variable.
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8 Introduction Spanish Case: The Treasury is the organism responsible for financing the needs of the State and issuing securities. • To achieve stable, continuous financing. • To reduce the cost of financing. • Maintaining an appropriate level of market liquidity • To offer investors attractive financial instruments. The Bank of Spain, on the other hand, is the responsible for organising the Secondary market where securities are traded, but direct financing of the Treasury is prohibited.
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Instruments
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Instruments There are different types of Fixed Income securities: Bills, STRIPS, Consols, bonds, notes, convertible bonds, etc. Basic features of Fixed Income: Maturity: short term or Long term. Coupon: The coupon of a bond is the amount that the bond pays periodically. The coupon is expressed as a percentage on the nominal value of the bond. The Internal Rate of Return (IRR) of a bond is that of the discount rate that makes the market price today the same as the current value of all cash flows the bond will pay in the future. IRR is also known as Yield to Maturity (YTM) 10
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T-Bills T-Bills are short-term Fixed Income securities that are issued through auction at a discount. Spain: maturity from 6 to 18 months.
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Module_5 - Module 5 Learning Goals To understand the...

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