Lecture02 Financial Instruments and Markets

Lecture02 Financial Instruments and Markets - Financial...

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Unformatted text preview: 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 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 • 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 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...
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This note was uploaded on 06/06/2011 for the course FINA 4310 taught by Professor Staff during the Spring '08 term at University of Georgia Athens.

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Lecture02 Financial Instruments and Markets - Financial...

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