Chapter08 - Chapter 8 Bond Markets Bond Markets Part of...

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Chapter 8 Bond Markets
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Bond Markets Part of Capital Markets brings LT  (over 1 year)  Part of Capital Markets brings LT  (over 1 year)  borrowers and investors together borrowers and investors together Majors issuers (borrowers) in capital Markets Majors issuers (borrowers) in capital Markets Households – mortgages Households – mortgages Business – bonds, stock Business – bonds, stock Governments – federal, state and local bonds Governments – federal, state and local bonds Major Investors Major Investors Households – both directly and indirectly Households – both directly and indirectly Foreign Investors Foreign Investors
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1. 1. U.S. Treasury + Agency Securities U.S. Treasury + Agency Securities Coupon Issues Coupon Issues Notes – one to 10 year maturity Notes – one to 10 year maturity Bonds – over 10 year maturity Bonds – over 10 year maturity Sold at auction by the Federal Reserve Sold at auction by the Federal Reserve Trend towards shorter term financing; 30 year  Trend towards shorter term financing; 30 year  bond – discontinued from 2001 to Feb.2006 bond – discontinued from 2001 to Feb.2006 U.S. Government Issues  – Notes +Bonds
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INFLATION – INDEXED NOTES and BONDS (TIPS) principal adjusted for inflation U.S. Government Issues  – Notes +Bonds Consumer Price Index Fixed coupon rate determined at auction      Designed to provide investors protection against inflation       Allows for calculation of  Δ Ρ from Fisher equation  Δ Ρ e   =  i – r Yield on Treasury Yield on TIPS
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SEPARATE TRADING OF REGISTERED  INTEREST AND PRINCIPAL (STRIPS) ۰ Treasury security separated into component parts - each interest payment and final principal payment  becomes a zero coupon bond ۰ Created by gov’t securities dealers  ۰ Often stripped security is more valuable in pieces than  whole ۰ High demand for zero coupon securities – interest rate risk  management U.S. Government Issues  – Notes and Bonds
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2. State & Local Government Bonds (MUNIS)
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