2 Financial Instruments

2 Financial Instruments - Financial Instruments 1 Comm367...

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Comm367 1 Financial Instruments
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Comm367 2 Summary of Financial Instruments u Non-marketable financial assets u Money market instruments u Fixed-income instruments u Equities u Derivative Securities Options and Futures
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Comm367 3 Summary of Financial Instruments u For each type of instrument: Who issues it? What is the structure? How is it issued/traded? Who holds it? How risky is it?
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Comm367 4 Non-Marketable Financial Assets u Examples: Savings deposits, Canada Savings Bonds (CSBs), Guaranteed Investment Certificates (GICs) u Commonly owned by individuals u Represent direct exchange of claims between issuer and investor u Usually “safe” investments which are easy to convert to cash without loss of value
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Comm367 5 Money Market Securities u Examples: Treasury bills, commercial paper, Eurodollars, repurchase agreements, banker’s acceptances (B/ As) u Marketable: claims are negotiable or saleable in the marketplace u Short-term, liquid, relatively low-risk debt instruments Issued by governments and private
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Comm367 6 Treasury Bills and Treasury Bonds u Treasury bills – money market instruments u Treasury bonds – fixed income instruments u Issuer: federal government u Structure of T-Bills Short term (3 month, 6 month, 1 year) At maturity, receive face value of the bill, normally $10,000 Sold at a discount, representing the interest
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Comm367 7 Treasury Bills and Treasury Bonds u Structure of Treasury Bonds Longer term (up to 30 years) receive face value at maturity semi-annual coupon payments u Trading Initial Sale through regular auctions Subsequent trading through primary dealers
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Comm367 8 Money Market Instrument Yields u Yield ≈ return on your investment Think of it as an interest rate Inverse relation between price and yield u Yields on Money Market instruments are not always directly comparable u Factors influencing yields Par value vs. investment value 360 vs. 365 days assumed in a year (366 leap year)
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Comm367 9 Bond Equivalent Yield for CDN T-bills P = price of the T-bill n = number of days to maturity n P P r BEY 365 000 , 1 × - =
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Comm367 10 Bank Discount Yield for U.S. T-Bills rBD = bank discount rate P = market price of the T-bill n = number of days to maturity n P r BD 360 000 , 1 000 , 1 × - =
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Comm367 11 Money Market Instrument Yields Example : A T-Bill selling at $980 with 90 days maturity % 8 90 360 000 , 1 980 000 , 1 = × - = BD r 8.28%     .0828     4.0556   x   .0204 90 365 980 980 000 , 1 = = = × - = BEY r
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Comm367 12 Money Market Instrument Yields u Impossible to compare T-bills directly with bonds 360 vs. 365 days Return is figured on par vs. price paid u US T-bills – quoted in bank discount yields u Canadian T-bills – quoted in bond equivalent yields u Adjust the bank discount rate to make it comparable
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Comm367 13 Equivalence of Yields u Equivalence formula: ) ( 360 365 n r r r BD BD BEY × - × = 1 ) / 365 1 ( 365 - + = n BEY eff n r r Also, the effective annual yield is:
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This note was uploaded on 08/03/2011 for the course ECON 503 taught by Professor Motherfucker during the Spring '11 term at Aarhus Universitet.

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2 Financial Instruments - Financial Instruments 1 Comm367...

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