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Lecture02 Financial Instruments and Markets

Lecture02 Financial Instruments and Markets - Financial...

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Financial Instruments and Markets Tyler R. Henry 1 FINA 4310 Fall 2010 Outline Contents 1 Money Markets 2 1.1 T-bill Quotes and Yields . . . . . . . . . . . . . . . . . . . . . . . . 4 2 Treasury Auctions 6 3 Capital Markets 7 3.1 Long-Term Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 3.2 Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 3.3 Derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Money Markets vs. Capital Markets Money Markets Short-term debt "Cash and cash equivalents" Highly liquid Low-risk Capital Markets Long-term Debt and equity Varying degrees of risk and liquidity 1
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1 Money Markets Money Market Instruments Treasury Bills Certificates of Deposit (CDs) Commercial Paper (CP) Bankers’ Acceptances Repurchase agreements (repos) and Reverse repos Eurodollars Federal Funds Money Market Instruments Treasury Bills (T-bills) Maturities 28 days ("1-month") 91 days ("3-month") 182 days ("6-month") 364 days ("1-year"’) issued at weekly auction Sold at discount to maturity value quoted as a discount rate Minimum denominations of $100 Highly liquid Competitive and noncompetitive bids Money Market Instruments Certificates of Deposit (CDs) Time deposit with a bank: penalty for early withdrawal Insured by FDIC up to $100,000 Short-term CDs highly marketable Commercial Paper (CP) 2
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Short-term debt issued by large corporations (low credit risk) Maturities up to 270 days Denominations of $100,000 Highly liquid Often rolled over Money Market Instruments Bankers’ Acceptances Like a postdated check Used often in international trade Unknown trade parties can secure bank’s credit standing Repurchase agreements (Repos) Very short-term loans acquired by government securities dealers usually overnight Dealer sells gov’t securities to investor and agrees to repurchase at higher price in future usually next day Reverse repo: opposite transaction where gov’t dealer lends money buys securities from investor then sells back Money Market Instruments Eurodollars Deposits of U.S. dollars at foreign banks or foreign branches of U.S. banks Federal funds A bank’s reserve requirement funds on deposit with their Federal Reserve Bank. Fed funds market is overnight lending/borrowing of these funds between banks. interest rate on these overnight loans is the Federal Funds rate Federal Funds Rate: 1954:07 - 2009:07 3
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Money Market Instruments London Interbank Offer Rate (LIBOR) Lending rate between large banks in London Benchmark interest rate for many other transactions (e.g., Swaps) LIBOR + 1.5% 1.1 T-bill Quotes and Yields Bank Discount Rate
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