FINA 4310 Midterm 1

• Treasury Bills
• Certificates of Deposit
• Commercial Paper
• Bankers' Acceptances
• Eurodollars and LIBOR
• Repurchase Agreements (RPs) and Reverse RPs
• Federal Funds*
• Brokers' Calls*

*not in notes

refers to cash in hand and in bank account, as well as cash equivalents which are Money Market Instruments including short term, marketable, liquid, low-risk debt securities.

a subsector of the debt market; include short-term (typically less than 1 yr to maturity), highly liquid and marketable, and relatively low-risk debt instruments; often considered cash equivalents

pool the resources of many investors and purchase a wide variety of money market securities on their behalf, making them easily accessible to small investors

short-term government securities issued at a discount from face value and returning the face amount at maturity; the most marketable of all money market instruments and represent the simplest form of borrowing; income earned is only taxable at the federal level; this of this rate as the govt risk free rate

price you have to pay to buy a T-bill from a securities dealer

slightly lower price you'd receive if you sold a T-bill to a dealer

they are inversely related

a bill's discount from par value is "annualized" based on a 360 day year, and then reported as a percentage of par value.

Bank Discount Rate = [(face value-market price T-bill)/face value] * (360/number of days to maturity)

OR r_BD=[(P₁-P₀)/P₀]* (360/n)

uses compounding to turn BEY simple interest rate into a compound annual rate

Rate=(1+(P₁-P₀)/P₀)^365/n

[(P₁-P₀)/P₀]* (365/number of days to maturity)

a bank time deposit; time deposits may NOT be withdrawn on demand; those issued in denominations over $100K are negotiable; short term ones are higly marketable

short-term unsecured debt issued by large corporations directly to the public rather than borrowing from banks; considered fairly safe and liquid

issued by financial firms (like banks) to raise funds for the firm to invest in other assets; short term; assets are collateral

an order to a bank by a customer to pay a sum of money at a future date (typically within 6 months); typically a safe asset that trades at a discount from face value; widely used in foreign trade

Dollar-denominated deposits at foreign banks or foreign branches of American banks; usually large sums with less than 6 months to maturity

lending rate among banks in the London market

short-term sales of govt securities with an agreement to repurchase the securities at a higher price; short-term, overnight borrowing; essentially a 'one day loan'

debt obligations of the federal government with original maturities of one year or more; think of as the safest long term investments

a bond denominated in a currency other than that of the country in which it is issued

organizations that provide liquidity to the mortgage market

inflation-protected security bonds; provide a constant stream of income in real dollars, and real interest rates are risk-free if held to maturity

tax-exempt bonds issued by state and local governments

• 1. general obligation bonds (backed by full faith and credit/taxing power of the issuer)
• 2. revenue bonds (issued to finance projects)

a revenue bond that is issued to finance commericial enterprises (e.g. a factory that can be operated by a private firm)

the rate a taxable bond would need to offer in order to match the after tax yield on a tax-free muni.

before-tax ROR on taxable bonds*(1-combined federal and local marginal tax rate)=municipal bond rate

r(1-t)=r_m

long-term debt issued by private corporations typically paying semi-annual coupons and returning the face value of the bond at maturity; higher yield/ riskier bonds

an unsecured bond

either an ownership claim in a pool of mortgages or an obligation that is secured by such a pool; an invested portfolio in mortgage loans through securitization and pooling

ownership shares in a public corporation; shareholders have voting rights and may receive dividends; some characteristics include residual claims and limited liability

nonvoting shares in a corporation, usually paying a fixed stream of dividends; has featyres of both equity and debt

certificates traded in US markets that represent ownership shares of a foreign company

consists of 30 large, "blue-chip" corporations; has been computed since 1896

consists of 500 large companies

the ultimate US equity index so far computed; index of the market value of essentially all actively traded stocks in the US (approx 6000 of them)

an average computed by adding the prices of the stocks together and dividing by a divisor**

computed by calculating a weighted average of the returns of each security in the index, with weights proportional to outstanding market value**

National Association of Securities Dealers Automatic Quotation System

a portfolio of shares that can be bought or sold as a unit, just as a single share would be traded

an index computed from a simple average of returns

Japanese index

UK index

German index

Hong Kong index

Toronto Index

French Index

Swedish index, recently purchased by NASDAQ

Shanghai Stock Exchange

Europe, Australia and the Far East; a world benchmark

Morgan Stanley Capital Index; used to invest in countries; computes over 50 country indexes and several regional indexes

a security with a payoff that depends on the prices of other securities

the right to buy an asset at a specified price on or before a specified expiration date; only makes sense to exercise if the market value of the asset that may be purchased exceeds the exercise price

the right to sell an asset at a specified exercise price on or before a specified expiration date; profits on these options increase when an asset value falls

decrease, increases

increase, increases

obliges traders to purchase or sell an asset at an agreed-upon price at a specified future date***

• Long (buy)
• Short (sell)

Intercontinental Exchange; based in Atlanta; $8 billion market cap, owned by about 18 people which shows that anyone can create and exchange

Market for new issues of securities; only time the issuer receives the proceeds from the sale

first sale of stock by a formerly private company; stock is marketed through 'road sales' (are only sold through underwriters)

market for already existing securities; exisiting owner sells to another party

price*(shares outstanding)

when computer programs stopped sending orders and therefore halted trades, which caused the market to drop by approx 1000 points in an hour

stock exchange based in Kansas City, MO that took 10% of total market trading from NYSE

type of ATS; offers some anonymity so traderes are not easily identifiable

markets in which traders specializing in particular assets buy and sell for their own accounts

a market where all traders meet at one place to buy or sell an asset

the price at which a dealer or other trader is willing to purchase/buy a security

the price at which a dealer or other trader is willing to sell a security

ask price - bid price

guaranteed to execute a trade, but no guarantee of price

guaranteed a price, but no guarantee of execution

a limit order that becomes a market order once the price falls through the stop loss price; not guaranteed a price

an informal network of brokers and dealers who negotiate sales of securities

computer networks that allow direct trading without the need for market makers