Chapter+5+Updated+Slides++Interest+Rate+Markets

Chapter+5+Updated+Slides++Interest+Rate+Markets -...

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Derivative Securities Chapter 5 Chapter 5 Interest Rate Markets Interest Rate Markets
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FIN 480 ( Instructor- SfR) Chapter 5 2 Types of Rates z Treasury rates z LIBOR z Repo rates
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FIN 480 ( Instructor- SfR) Chapter 5 3 Treasury rates z Rates on Treasury securities z Most recently auctioned issues of a given maturity called “On the run issues “ exist for following maturities: 1m, 3m, 6m, 12 m, 2 yr, 5yr, 10yr z Those with maturities 3 yrs, 7 yrs, 15 yrs, 20 yrs and 30 yrs have been discontinued z Par values are used to figure out the underlying yields
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FIN 480 ( Instructor- SfR) Chapter 5 4 LIBOR- London Interbank offered rate z Determined based on the quotations of 16 major banks; Rate at which banks and FIs transact in the London Interbank market z The lender bank invests cash in a CD issued by borrower bank. z Maturity of the CD short tem i.e. overnight to 1 year z Credit rating of the borrower is AA ( LIBOR Is not completely a risk free rate) z Currencies supported: Pound, Euro, US $, CAD, AUD, Yen, SW Francs Called Euro currency market; outside the control of a single government z Borrowing USD in LIBOR market would be a Eurodollar loan
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FIN 480 ( Instructor- SfR) Chapter 5 5 LIBOR vs. LIBID z LIBOR: London Interbank offered rate rate at which a bank makes deposits z LIBID: London Interbank bid rate rate at which a bank accepts deposits z LIBOR>LIBID Offer rate>bid rate
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FIN 480 ( Instructor- SfR) Chapter 5 6 Repurchase agreement (Repo) rates z Borrower deposits securities with custodian and borrows money from a Lender z At maturity the buyer buys back the securities at a pre-agreed price (includes a premium) z The implied rate is the repo rate z Essentially a Forward contract z Maturity: Overnight repo and term repo
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FIN 480 ( Instructor- SfR) Chapter 5 7
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This note was uploaded on 03/23/2011 for the course BUSINESS bus 173 taught by Professor Rtm during the Spring '11 term at IUP.

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Chapter+5+Updated+Slides++Interest+Rate+Markets -...

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