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•Or 40%•3%/(1-.3)= 4.29%•3%/(1-.4) = 5%
Bond Market Instruments•Federal Agency Debt –issued by Federal Government Agencies•Primarily mortgage related FHLB, FNMA, GNMA, FHLMC–Backing is IMPLICIT rather than GURANTEED
Bond Market Instruments•Corporate Bonds- debt instrument issued by PRIVATE companies and which have specified collateral backing them (cash flow or assets)–Interst rate risk vs credit risk
Bond Market Instruments•MBS- A debt instrument with a pool of real estate loans as the underlying collateral.•ABS-A debt security backed by notes or receivables against assets other than real estate (i.e., auto loans,credit cards, student loans).
Bond Market•Securitizationis the financial practice of pooling various types of contractual debt such as residential mortgages, commercial mortgages, auto loans or credit card debt obligations (or other non-debt assets which generate receivables) and selling their related cash flows to third party investors assecurities, which may be described as bonds, pass-through securities, or collateralized debt obligations (CDOs).•Investors are repaid from the principal and interest cash flows collected from the underlying debt and redistributed through the capital structure of the new financing.•Securities backed by mortgage receivables are called mortgage-backed securities (MBS), while those backed by other types of receivables are asset-backed securities (ABS).
Asset Backed Securities (ABS)
Bowie Bonds•An asset-backed security which used the current and future revenue from albums recorded by musician David Bowie as there underlying asset•Bowie bonds, issued in 1997, had an interest rate of 7.9% and a life of 10 years. •Eventually lead to the securitization of a lot of revenue streams that should not have been securitized!!
Equities•Common Stock- represents ownership in a corporation–Holder gets right to vote on corporate governance matters and share in financial benefit (ie dividends etc)–Represents a RESIDUAL claim in the event of liquidation–Limited Liability
Equities•Preferred Stock- equity ownership with fixed income like characteristics (ie dividend)–Promises to pay holder FIXED STREAM OF INCOME (DIVIDEND)–Dividend is typically cumulative–Preference over equity holders, but subordinate to bond holders in a liquidation–No voting power–Attractive to corporations because of tax treatment
Equities•Depository Receipts (ADR)- certificates traded in the U.S. representing ownership in SHARES OF A FOREIGN COMPANY
Stock and Bond Market Indexes
Stock and Bond Market Indexes•Uses–Track Returns–Benchmark for performance measurement–Base of derivatives
Stock and Bond Market Indexes•Stock Market Indexes–DJIA- widely quoted but not widely used–S&P 500- widely used but should it be?