instruments - FINANCE431 Investments Lecture 2: Financial...

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FINANCE 431 Investments Lecture 2: Financial Markets and Instruments
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FIN 431: Investments 2 Topics Money Market Fixed Income Capital Market Equity Markets Market Indexes Derivative Markets
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FIN 431: Investments 3 Outstanding Debt (Billions)    Source:  Bond Market Association 0 1000 2000 3000 4000 5000 6000 T r e a s u i M n c p l o y k t C g F d A $ Billions 1985 2004
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FIN 431: Investments 4 Who Owns U.S. Treasury Debt? As of 2004, foreign investors owns 46.7%. US monetary authority – 17.9% Pension Funds – 7.5% Mutual Funds – 6.8% Individuals – 6.6% State and local governments – 5.5% (Source: BondMarkets.com)
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FIN 431: Investments 5 Money Market Short-term debt Usually, maturity is one-year or less Low Risk High Liquidity Large Denominations “Cash Equivalent” Money Market Mutual Funds
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FIN 431: Investments 6 Money Market Instruments U.S. Treasury Bills (T-Bills) Commercial Paper Certificates of Deposit Eurodollars Federal Funds Repurchase Agreements (Repos)
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FIN 431: Investments 7 Treasury Bills (T-Bills) Discount Bonds No explicit interest rate Interest rate implicit in the price Initially sold at auction Maturities: 1 month, 3 months, 6 months 52 week T-bills discontinued in Feb 2001 Then they trade on secondary market
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FIN 431: Investments 8 Commercial Paper Short-term unsecured debt issued by firms Short maturity (1 or 2 months, but can be up to 270 days) Sold on a discount basis (like T-bills) Default is possible
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FIN 431: Investments 9 Certificates of Deposit (CDs) Time deposit with a bank Maturity and interest rate specified Available to individual investors Most insured up to $100,000 by FDIC
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FIN 431: Investments 10 Eurodollars Dollar-denominated deposits in foreign banks or foreign branches of U.S. banks (not just European) Not subject to U.S. bank regulations Important cash management tool for large institutions Denominations of $1 Million or more
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FIN 431: Investments 11 Federal Funds Short-term unsecured loans settled in immediately available funds Mostly overnight loans Large players [Increments of $1 Million] U.S. Treasury Foreign Governments Used by banks to meet reserve requirements
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FIN 431: Investments 12 Repurchase Agreements (Repos) Like Federal Funds, but collateralized by government securities Typically used for overnight borrowing
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FIN 431: Investments 13 Money Market Mutual Funds Mutual fund that invests only in money market instruments Gives small investors access to money market Can be used as a “sweep account”
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This note was uploaded on 04/09/2012 for the course FIN 431 taught by Professor Sun during the Spring '12 term at Old Dominion.

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instruments - FINANCE431 Investments Lecture 2: Financial...

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